You have just been hired by FAB Company, the manufacturer of a revolutionary new garage door opening device. John Foster, 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 are able to determine the following cost formulas for the company’s normal operating range of 10,000 to 20,000 units each month:

Overhead Costs                       Cost Formula
Utilities.......................................$0.90 per machine-hour
Maintenance.............................$1.60 per machine-hour plus $40,000 per month
Machine setup..........................$0.30 per machine-hour
Indirect labour..........................$0.70 per machine-hour plus $130,000 per month
Depreciation..............................$70,000 per month

To show the president how the flexible budget concept works, you have gathered the following actual cost data for the most recent month, March, in which the company produced 13,000 units:

Utilities..........................................$ 24,200
Maintenance....................................78,100
Machine setup...................................8,400
Indirect labour...............................149,600
Depreciation....................................71,500
Total cost......................................$331,800

The only variance in the fixed costs for the month was with depreciation, which increased as a result of a purchase of new equipment.

The company had originally planned to work 17,000 units during March using the standard quantity of 34,000 machine-hours.

Required:

1. Prepare flexible budgets for the company in increments of 2,500 units from 10,000 units to 15,000 units.

2. Prepare a flexible budget overhead performance report for the company for March. (Use the format illustrated in Exhibit 11–7.)

3. What additional information would you need to compute an overhead efficiency variance for the company?