Olivera Corporation's flexible budget performance report for last month shows that actual indirect materials cost, a variable cost, was $31,178 and that the spending variance for indirect materials cost was $2,261 unfavorable. During that month, the company worked 11,900 machine-hours. Budgeted activity for the month had been 12,200 machine-hours. The cost formula per machine-hour for indirect materials cost must have been closest to:
A)$2.74
B)$2.81
C)$2.37
D)$2.43

Question

Quizplus · Accepted Answer

The flexible budget formula for indirect materials cost can be expressed as:

Budgeted cost for indirect materials cost + (Variable cost per machine-hour x Actual machine-hours)

The flexible budget formula can be rearranged as:

Variable cost per machine-hour = (Flexible budget for indirect materials cost - Budgeted cost for indirect materials cost) ÷ Actual machine-hours

Flexible budget for indirect materials cost = Budgeted cost for indirect materials cost + (Budgeted variable cost per machine-hour x Budgeted machine-hours)

Substituting the given information:

Budgeted cost for indirect materials cost = Flexible budget for indirect materials cost - (Budgeted variable cost per machine-hour x Budgeted machine-hours)

= $31,178 + $2,261 = $33,439

Variable cost per machine-hour = ($33,439 - ($2.37 x 12,200)) ÷ 11,900

= $2.43

Therefore, the cost formula per machine-hour for indirect materials cost is closest to option D: $2.43.

Olivera Corporation's Flexible Budget Performance Report for Last Month Shows