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 $16,400 plus $0.17 per machine-hour $ 21,430 Maintenance $38,200 plus $2.00 per machine-hour $ 70,000 Supplies $0.50 per machine-hour $ 9,300 Indirect labor $94,300 plus $2.00 per machine-hour $ 133,200 Depreciation $67,900 $ 69,600 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. Calculate the activity variances for March. 2. Calculate the spending v ariances for March.

Answer 1

• [1]

	Activity Variance
	[D = Difference between C & E]
Utilities	$340	F
Maintenance	$4,000	F
Supplies	$1,000	F
Indirect Labor	$4,000	F
Depreciation	$0	None
Total Expenses	$9,340	Favourable

• [2]

	Spending Variance
	[B = Difference between A & C]
Utilities	$2,140	U
Maintenance	$2,200	F
Supplies	$800	U
Indirect Labor	$4,900	U
Depreciation	$1,700	U
Total Expenses	$7,340	U

• Working

							Actual result	Flexible Budget	Planning Budget
Machine hours							17,000	17,000	19,000
							[A]	[C = Fixed + (Var x Actual units)]	[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$16,400	+(	$                  0.17	x	17000 or 19000	)	$21,430	$19,290	$19,630
Maintenance	$38,200	+(	$                  2.00	x	17000 or 19000	)	$70,000	$72,200	$76,200
Supplies	$0	+(	$                  0.50	x	17000 or 19000	)	$9,300	$8,500	$9,500
Indirect Labor	$94,300	+(	$                  2.00	x	17000 or 19000	)	$133,200	$128,300	$132,300
Depreciation	$67,900	+(	$                      -	x	17000 or 19000	)	$69,600	$67,900	$67,900
Total Expenses	$216,800	+(	$5	x	17000 or 19000	)	$303,530	$296,190	$305,530

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]