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Problem P21-2A
Fultz Company manufactures tablecloths. Sales have grown rapidly over the past 2 years. As a result, the president has installed a budgetary control system for 2010. The following data were used in developing the master manufacturing overhead budget for the Ironing Department, which is based on an activity index labor hours.

Rate per Direct
Variable Costs labor Hour Annual Fixed Costs
Indirect labor \$0.40 Supervision \$42,000
Indirect materials 0.50 Depreciation 18,000
Factory utilities 0.30 Insurance 12,000
Factory repairs 0.20 Rent 24,000

The master overhead budget was prepared on the expectation that 480,000 direct labor hours will be work during the year. In June, 42,000 direct labor hours were worked. At that level of activity, actual costs were as shown below.

Variable -per direct labor hour: Indirect labor \$0.43, Indirect materials \$0, 49, Factory utilities \$0.32, and factory repairs \$0.24.

Fixed: same as budget.

Instructions
(a) Prepare a monthly manufacturing overhead flexible budget for the year ending December 31, 2010, assuming production levels range from 35,000 to 50,000 direct labor hours. Use increments of 5,000 direct labor hours.
(b) Prepare a budget report for June comparing actual results with budget data based on the flexible budget.
(c) Were costs effectively controlled? Explain
(d) State the formula for computing the total budgeted costs for the Ironing Department.
(e) Prepare the flexible budget graph, showing total budgeted costs at 35,000 and 45,000 direct labor hours. Use increments of 5,000 direct labor hours on the horizontal axis and increments of \$10,000 on vertical axis.

#### Solution Summary

The solution explains how to prepare a manufacturing overhead flexible budget and use it for performance evaluation

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## Variance Analysis

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The ABC Company has an automated production process, and production activity is quantified in terms of machine hours. It uses a standard-costing system. The annual static budget for
20x6 called for 6,000 units to be produced, requiring 30,000 machine hours. The standard-overhead rate for the year was computed using this planned level of production. The 20x6 manufacturing cost report follows.

The company produced a total of 6,200 units during 20x6, requiring 32,000 machine hours. The preceding manufacturing cost report compares the company's actual cost for the year with the static budget and the flexible budget for two different activity levels.
Required
Compute the following amounts. For variances, indicate favorable or unfavorable where appropriate. Answers should be rounded to two decimal places when necessary.

e. The variable-overhead rate per machine hour in a flexible-budget formula. (Hint: Use the high-low method to estimate cost behavior.)

k. The total budgeted manufacturing cost (in thousands of dollars) for an output of 6,050 units. (Hint: Use the flexible-budget formula.)
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