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Exercise On Flexible Budget - Fab Corporation

FAB Corporation manufactures garage door opening devices. To better control manufacturing overhead costs, a flexible budget was prepared using cost formulas and actual March data. The flexible budget showed total planned expenses were $330,800. Variance analysis found activity variances were favorable except for depreciation which was not applicable. Spending variances showed actual expenses were $1,000 unfavorable to the flexible budget primarily due to utilities, supplies, and indirect labor being overspent.

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Hazim Badrin
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824 views3 pages

Exercise On Flexible Budget - Fab Corporation

FAB Corporation manufactures garage door opening devices. To better control manufacturing overhead costs, a flexible budget was prepared using cost formulas and actual March data. The flexible budget showed total planned expenses were $330,800. Variance analysis found activity variances were favorable except for depreciation which was not applicable. Spending variances showed actual expenses were $1,000 unfavorable to the flexible budget primarily due to utilities, supplies, and indirect labor being overspent.

Uploaded by

Hazim Badrin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EXERCISE ON FLEXIBLE BUDGET

QUESTION 1: Activity and Spending Variances


[The following information applies to the questions displayed below.]
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:
Actual Cost
Cost Formula in March
  Utilities   $20,600 plus $0.10 per machine-hour $24,200
  Maintenance  $40,000 plus $1.60 per machine-hour $78,100
  Supplies   $0.30 per machine-hour $8,400
  Indirect
  $130,000 plus $0.70 per machine-hour $149,600
labor
  Depreciation   $70000 $71,500

During March, the company worked 26,000 machine-hours and produced 15,000
units. The company had originally planned to work 30,000 machine-hours during
March.

Required:
1. Prepare a planning / fixed budget.
2. Prepare a flexible budget.
3. Prepare a report showing the activity variances or March.
4. Prepare a report showing the spending variances for March.
1. Planning / Fixed budget

FAB Corporation
For the month ended 31 March
Planning budget
Number of machine hours 30,000 hours

Expenses:
Utilities [RM20 600 + (RM0.1 x 30 000) RM 23,600
Maintenance [RM40 000 + (RM1.6 x 30 000)] RM 88,000
Supplies [RM0.3 x 30 000] RM 9,000
Indirect labor [RM130 000 + (RM0.7 x 30 000)] RM 151,000
Depreciation RM 70,000
Total expense RM 341,600

2. Flexible budget

FAB Corporation
For the month ended 31 March
Flexible budget
Number of machine hours 26,000 hours

Expenses:
Utilities [RM20 600 + (RM0.1 x 26 000) RM 23,200
Maintenance [RM40 000 + (RM1.6 x 26 000)] RM 81,600
Supplies [RM0.3 x 26 000] RM 7,800
Indirect labor [RM130 000 + (RM0.7 x 26 000)] RM 148,200
Depreciation RM 70,000
Total expense RM 330,800
3. Prepare a report showing the activity variances for March

Planning budget Flexible budget Activity variance


(RM) (RM) (RM)
Number of machine hours 30,000 hours 26,000 hours
Expenses:
Utilities 23,600 23,200 400 F
Maintenance 88,000 81,600 6,400 F
Supplies 9,000 7,800 1,200 F
Indirect labor 151,000 148,200 2,800 F
Depreciation 70,000 70,000 0 NA
Total expenses 341,600 330,800 10,800 F

4. Prepare a report showing the spending variance for March

Flexible budget Actual result Spending variance


(RM) (RM) (RM)
Number of machine hours 26,000 hours 26,000 hours
Expenses:
Utilities 23,200 24,200 1,000 UF
Maintenance 81,600 78,100 3,500 F
Supplies 7,800 8,400 600 UF
Indirect labor 148,200 149,600 1,400 UF
Depreciation 70,000 71,500 1,500 UF
Total expenses 330,800 331,800 1,000 UF

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