Question

1.

Jake’s Roof Repair has provided the following data concerning its costs:

	Fixed Cost per Month			Cost per Repair-Hour
Wages and salaries	$	21,000		$	15.00
Parts and supplies				$	7.60
Equipment depreciation	$	2,710		$	0.50
Truck operating expenses	$	5,750		$	1.80
Rent	$	4,680
Administrative expenses	$	3,860		$	0.70

For example, wages and salaries should be $21,000 plus $15.00 per repair-hour. The company expected to work 2,600 repair-hours in May, but actually worked 2,500 repair-hours. The company expects its sales to be $49.00 per repair-hour.

Required:

Compute the company’s activity variances for May. (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.

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	$16,000 plus $0.20 per machine-hour	$	22,400
Maintenance	$38,000 plus $1.30 per machine-hour	$	61,700
Supplies	$0.50 per machine-hour	$	11,300
Indirect labor	$94,300 plus $2.00 per machine-hour	$	141,200
Depreciation	$68,100	$	69,800

During March, the company worked 21,000 machine-hours and produced 15,000 units. The company had originally planned to work 23,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

				2,500	2,600
				Activity variance
				Flexible	Planned	Activity variance
				budget	Budget
	Revenue			122500	127400	4900	U
	Expenses:
	Wages and salaries			58500	60000	1500	F
	parts and supplies			19000	19760	760	F
	Equipment Depreciation			3960	4010	50	F
	Truck operating expenses			10250	10430	180	F
	Rent			4,680	4,680	0	N
	Administrative expenses			5610	5680	70	F
	total expense			102000	104560	2560	F
	net operating income			20500	22840	2340	U

			Activity variance = flexible budget - planned budget
					Flexible	planned	activity
					budget	Budget	variance
		machine hours			21,000	23,000
		fixed	variable
utilities		16,000	0.2		20200	20600	400	F
maintenance		38,000	1.3		65300	67900	2600	F
supplies			0.5		10500	11500	1000	F
indirect labor		94,300	2		136300	140300	4000	F
Depreciation		68,100			68,100	68,100	0	N
tota			4		300400	308400	8000	F
			cost formula = machine hours * variable cost per mh + fixed cost
			Spending variance = actual budget - flexible budget
					Flexible	Actual	Spending
					budget	Budget	variance
		machine hours			21,000	21,000
		fixed	variable
utilities		16,000	0.2		20200	22,400	2200	U
maintenance		38,000	1.3		65300	61,700	3,600	F
supplies			0.5		10500	11,300	800	U
indirect labor		94,300	2		136300	141,200	4900	U
Depreciation		68,100			68,100	69,800	1,700	U
tota			4		300400	306,400	6,000	U