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	$16,600 + $0.19 per machine-hour	$	22,580
Maintenance	$38,400 + $1.80 per machine-hour	$	71,800
Supplies	$0.90 per machine-hour	$	19,600
Indirect labor	$94,400 + $1.20 per machine-hour	$	121,700
Depreciation	$67,500	$	69,200

During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

The table below contains the calculation of Activity and Spending variances for the month of march:

Machine hours	22000			20000			20000
	Budgeted cost	Activity variance		Flexible budget	Spending variance		Actual cost
Utilities	20,780	380	F	20,400	(2,180)	U	22,580
Maintainance	78,000	3,600	F	74,400	2,600	F	71,800
Supplies	19,800	1,800	F	18,000	(1,600)	U	19,600
Indirect labor	120,800	2,400	F	118,400	(3,300)	U	121,700
Depreciation	67,500	6,136	F	61,364	(7,836)	U	69,200
		14,316			(12,316)

Activity variance for the march is $14,316 (F)

Spending variance for the march is -$12,316 (U)