Decision Analysis: Developing a Flexible Budget and Analyzing overhead Variances

C4. Business appliCation â–¶ The controller at FT Industries has asked you, her new assistant, to analyze the following data related to projected and actual overhead costs for October:

 

 

 

 

 

Variable overhead Costs

 

Standard Variable Costs per Machine Hour (MH)

 

Actual Variable Costs in

october

 

Indirect materials and supplies                           $1.10                                      $  2,380

Indirect machine setup labor                                 2.50                                          5,090

Materials handling                                                  1.40                                          3,950

Maintenance and repairs                                       1.50                                          2,980

Utilities                                                                     0.80                                          1,490

Miscellaneous                                                          0.10                                             200

Totals                                                                      $7.40                                      $16,090

                                                                                                                                                                               

 

Fixed overhead Costs

 

Budgeted Fixed overhead

 

Actual Fixed overhead in october

 

Supervisory salaries                                   $  3,630                                            $  3,630

Machine depreciation                                    8,360                                                8,580

Other                                                               1,210                                                1,220

 

                                                                                                                              

Totals                                                          $13,200                                            $13,430

                                                                                                                              

For October, the number of good units produced was used to compute the 2,100 stan- dard machine hours allowed.

1.    Prepare a monthly flexible budget for operating activity at 2,000 machine hours, 2,200 machine hours, and 2,500 machine hours.

2.    Develop a flexible budget formula.

3.    The company’s normal operating capacity is 2,200 machine hours per month. Com- pute the fixed overhead rate at this level of activity. Then break the rate down into rates for each element of fixed overhead.

4.    Prepare a detailed comparative cost analysis for October. Include all variable and fixed overhead costs. Format your analysis by using columns for the following five elements: cost category, cost per machine hour, costs applied, actual costs incurred, and variance.

5.    Develop an overhead variance analysis for October that identifies the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.

6.    Prepare an analysis of the variances. Could a manager control some of the fixed costs? Defend your answer.