Response to the following problem:
Durrant Company has had great difficulty in controlling manufacturing overhead costs. At a recent convention, the president heard about a control device for overhead costs known as a flexible budget, and he has hired you to implement this budgeting program in Durrant Company. After some effort, you have developed the following cost formulas for the company's Machining Department. These costs are based on a normal operating range of 10,000 to 20,000 machine-hours per month:
Overhead Cost
Utilities . . . . . . . . . . . . . $0.70 per machine-hour
Lubricants . . . . . . . . . . . $1.00 per machine-hour plus $8,000 per month
Machine setup . . . . . . . $0.20 per machine-hour
Indirect labor . . . . . . . . . $0.60 per machine-hour plus $120,000 per month
Depreciation . . . . . . . . . $32,000 per month
During March, the first month after your preparation of the above data, the Machining Department worked 18,000 machine-hours and produced 9,000 units of product. The actual manufacturing overhead costs for March were as follows:
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,000
Lubricants. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,500
Machine setup . . . . . . . . . . . . . . . . . . . . . . . 4,800
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . 132,500
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Total manufacturing overhead cost. . . . . . . . $205,800
Fixed costs had no budget variances. The department had originally been budgeted to work 20,000 machine-hours during March.
Required:
1. Prepare a flexible budget for the Machining Department in increments of 5,000 hours. Include both variable and fixed costs in your budget.
2. Prepare an overhead performance report for the Machining Department for the month of March. Include both variable and fixed costs in the report (in separate sections). Show only a spending variance on the report.
3. What additional information would you need to compute an overhead efficiency variance for the department?