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	$16,100 plus $0.18 per machine-hour	$	22,040
Maintenance	$38,100 plus $2.10 per machine-hour	$	80,200
Supplies	$0.50 per machine-hour	$	11,300
Indirect labor	$94,400 plus $1.30 per machine-hour	$	125,200
Depreciation	$67,700	$	69,400

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.	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

Ans. 1	FAB CORPORATION
	Activity   Variance
	For the Month Ended March 31
		Flexible Budget	Activity variance		Planning Budget
	Machine hours	21000			23000
	Utilities	$19,880	$360	F	$20,240
	Maintenance	$82,200	$4,200	F	$86,400
	Supplies	$10,500	$1,000	F	$11,500
	Indirect labor	$121,700	$2,600	F	$124,300
	Depreciation	$67,700	$0	none	$67,700
	Total expenses	$301,980	$8,160	F	$310,140
	Activity variance =   Flexible budget - Planning budget
Ans. 2	FAB CORPORATION
	Spending Variance
	For the Month Ended March 31
		Actual results	Activity variance		Flexible Budget
	Machine hours	21000			21000
	Utilities	$22,040	$2,160	U	$19,880
	Maintenance	$80,200	$2,000	F	$82,200
	Supplies	$11,300	$800	U	$10,500
	Indirect labor	$125,200	$3,500	U	$121,700
	Depreciation	$69,400	$1,700	U	$67,700
	Total expenses	$308,140	$6,160	U	$301,980
	Spending variance =   Actual results - Flexible budget
	*Calculations of Flexible budget and Planning budget:
		Flexible Budget	Planning Budget
	Machine hours	21000	23000
	Utilities	$16,100 + (0.18 * 21,000)	$16,100 + (0.18 * 23,000)
	Maintenance	$38,100 + ($2.10 * 21,000)	$38,100 + ($2.10 * 23,000)
	Supplies	$0.50 * 21,000	$0.50 * 23,000
	Indirect labor	$94,400 + ($1.30 * 21,000)	$94,400 + ($1.30 * 23,000)
	Depreciation	$67,700	$67,700
	*Flexible budget is prepared on the basis of actual hours.
	*Fixed expenses (Depreciation) remain same in Flexible budget and Planning budget.
	*Increase in expenses from flexible budget to actual results & Planning budget to flexible budget =   Unfavorable.
	*Decrease in expenses from flexible budget to actual results & Planning budget to flexible budget =   Favorable.