Elgin Company has recently introduced budgeting as an integral part of its corporate planning process. An inexperienced

Question:

Elgin Company has recently introduced budgeting as an integral part of its corporate planning process. An inexperienced member of the accounting staff was given the assignment of constructing a flexible budget for manufacturing overhead costs and prepared it in the format that follows:

The company assigns manufacturing overhead costs to production on the basis of standard machine-hours. The cost formulas used to prepare the budgeted figures above are relevant over a range of 80% to 100% of capacity in a month. The managers who will be working under these budgets have control over both fixed and variable manufacturing overhead costs.

Required:
1. Redo the company's flexible budget, presenting it in better format. Show the budgeted costs at 80%, 90%, and 100% levels of capacity. (Use the high-low method to separate fixed and variable costs.)
2. Express the flexible budget prepared in (1) above using a single cost formula for all overhead costs.
3. During May, the company operated at 86% of machine-hour capacity. Actual manufacturing overhead costs incurred during the month were as follows:
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,540
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,450
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,890
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,190
Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total actual manufacturing overhead cost . . . . . . . $104,070

Fixed costs had no budget variances. Prepare an overhead performance report for May. Include both fixed and variable costs in your report (in separate sections). Structure your report so that it shows only a spending variance for overhead. The company originally budgeted to work 40,000 machine-hours during the month; standard hours allowed for the month's production totaled 41,000 machine-hours.
4. Explain possible causes of the spending variance for supplies.
5. Compute an efficiency variance for total variable overhead cost, and explain the nature of the variance.