Question

You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. 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 determined the following cost formulas and gathered the following actual cost data for March:

	Cost Formula	Actual Cost in March
Utilities	$16,800 plus $0.15 per machine-hour	$	21,450
Maintenance	$38,900 plus $1.30 per machine-hour	$	57,400
Supplies	$0.60 per machine-hour	$	11,200
Indirect labor	$94,900 plus $2.00 per machine-hour	$	133,800
Depreciation	$68,300	$	70,000

During March, the company worked 17,000 machine-hours and produced 11,000 units. The company had originally planned to work 19,000 machine-hours during March.

Required:

1. Complete the report showing the activity variances for March. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

2. Complete the report showing the spending variances for March. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

• [1]

	Activity Variance
Utilities	$300	F
Maintenance	$2,600	F
Supplies	$1,200	F
Indirect Labor	$4,000	F
Depreciation	$0	None
Total Expenses	$8,100	Favourable

• [2]

	Spending Variance
Utilities	$2,100	U
Maintenance	$3,600	F
Supplies	$1,000	U
Indirect Labor	$4,900	U
Depreciation	$1,700	U
Total Expenses	$6,100	U

• Workings

							Actual result	Spending Variance		Flexible Budget	Activity Variance		Planning Budget
Machine hours							17,000			17,000			19,000
							[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$16,800	+(	$                  0.15	x	17000 or 19000	)	$21,450	$2,100	U	$19,350	$300	F	$19,650
Maintenance	$38,900	+(	$                  1.30	x	17000 or 19000	)	$57,400	$3,600	F	$61,000	$2,600	F	$63,600
Supplies	$0	+(	$                  0.60	x	17000 or 19000	)	$11,200	$1,000	U	$10,200	$1,200	F	$11,400
Indirect Labor	$94,900	+(	$                  2.00	x	17000 or 19000	)	$133,800	$4,900	U	$128,900	$4,000	F	$132,900
Depreciation	$68,300	+(	$                      -	x	17000 or 19000	)	$70,000	$1,700	U	$68,300	$0	None	$68,300
Total Expenses	$218,900	+(	$4	x	17000 or 19000	)	$293,850	$6,100	U	$287,750	$8,100	Favourable	$295,850

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]