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	$17,000 plus $0.20 per machine-hour	$	22,800
Maintenance	$38,000 plus $1.80 per machine-hour	$	67,800
Supplies	$0.60 per machine-hour	$	11,800
Indirect labor	$94,300 plus $1.70 per machine-hour	$	129,200
Depreciation	$68,400	$	70,100

During March, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally planned to work 20,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for Ma

Answer 1

• All working forms part of the answer
• Requirement 1 & 2 combined

	Actual Costs	Spending Variances		Flexible Budget	Activity Variances		Planning/Static Budget
Machine hour activity	18,000	Requirement 2		18,000	Requirement 1		20,000
Utilities	$           22,800.00	$             2,200.00	Unfavourable	$          20,600.00	$               400.00	Favourable	$        21,000.00
Maintenance	$           67,800.00	$             2,600.00	Favourable	$          70,400.00	$            3,600.00	Favourable	$        74,000.00
Supplies	$           11,800.00	$             1,000.00	Unfavourable	$          10,800.00	$            1,200.00	Favourable	$        12,000.00
Indirect Labor	$         129,200.00	$             4,300.00	Unfavourable	$        124,900.00	$            3,400.00	Favourable	$      128,300.00
Depreciation	$           70,100.00	$             1,700.00	Unfavourable	$          68,400.00	$                         -	None	$        68,400.00
Total Costs	$         301,700.00	$             6,600.00	Unfavourable	$        295,100.00	$            8,600.00	Favourable	$      303,700.00

• Working for above Flexible and Planning Budget data

	Actual Costs	Flexible Budget	Planning/Static Budget
Machine hour activity	18000	18000	20000
Utilities	22800	=17000+(18000 machine hours x $0.2)	=17000+(20000 machine hours x $0.2)
Maintenance	67800	=38000+(18000 machine hours x $1.8)	=38000+(20000 machine hours x $1.8)
Supplies	11800	=0.6 x 18000 machine hours	=0.6 x 20000 machine hours
Indirect Labor	129200	=94300+(1.7 x 18000 machine hours)	=94300+(1.7 x 20000 machine hours)
Depreciation	70100	68400	68400
Total Costs	Total Costs	Total Costs	Total Costs