Question

You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get better control of our manufacturing overhead costs.” You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control. After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for March: Cost Formula Actual Cost in March Utilities $16,600 plus $0.16 per machine-hour $ 21,280 Maintenance $38,700 plus $1.50 per machine-hour $ 59,500 Supplies $0.50 per machine-hour $ 8,800 Indirect labor $94,200 plus $1.80 per machine-hour $ 127,500 Depreciation $68,100 $ 69,800 During March, the company worked 16,000 machine-hours and produced 10,000 units. The company had originally planned to work 18,000 machine-hours during March. Required: 1. Prepare a flexible budget for March. 2. Prepare a report showing the spending variances for March.

Answer 1

SOLUTION

1. Flexible budget for March (16,000 machine-hours )

Particulars	Calculation	Amount ($)
Utilities	[$16,600 + ($0.16*16,000 machine-hours)]	19,160
Maintenance	[$38,700 + ($1.50*16,000 machine-hours)]	62,700
Supplies	($0.50*16,000 machine-hours)	8,000
Indirect labor	[$94,200 + ($1.80*16,000 machine-hours)]	123,000
Depreciation	68,100	68,100
Total		280,960

2. Spending variances for March

Particulars	Actual cost (A)	Flexible budget ($) (B)	Spending variance ($) (A-B)
Utilities	21,280	19,160	2,120 U
Maintenance	59,500	62,700	3,200 F
Supplies	8,800	8,000	800 U
Indirect labor	127,500	123,000	4,500 U
Depreciation	69,800	68,100	1,700 U
Total	286,880	280,960	5,920 U