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 plus $0.17 per machine-hour	$	21,120
Maintenance	$38,400 plus $1.10 per machine-hour	$	49,800
Supplies	$0.60 per machine-hour	$	9,400
Indirect labor	$94,100 plus $1.60 per machine-hour	$	120,600
Depreciation	$68,400	$	70,100

During March, the company worked 14,000 machine-hours and produced 8,000 units. The company had originally planned to work 16,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

• All working forms part of the answer
• Activity Variance = Difference between Planned Cost at planned Activity and Planned Cost for Actual Activity (or Flexible Budget)
• Spending Variance = Difference between Actual Cost and Flexible budget Cost.
• Both Requirement1 and Requirement 2 are done simultaneously in one table below for understanding:

	Actual Costs	Spending Variances		Flexible Budget	Activity Variances		Planning/Static Budget
Machine hour activity	14,000	Requirement 2		14,000	Requirement 1		16,000
Utilities	$           21,120.00	$             2,140.00	Unfavourable	$          18,980.00	$               340.00	Favourable	$          19,320.00
Maintenance	$           49,800.00	$             4,000.00	Favourable	$          53,800.00	$            2,200.00	Favourable	$          56,000.00
Supplies	$             9,400.00	$             1,000.00	Unfavourable	$             8,400.00	$            1,200.00	Favourable	$             9,600.00
Indirect Labor	$         120,600.00	$             4,100.00	Unfavourable	$        116,500.00	$            3,200.00	Favourable	$        119,700.00
Depreciation	$           70,100.00	$             1,700.00	Unfavourable	$          68,400.00	$                         -	None	$          68,400.00
Total Costs	$         271,020.00	$             4,940.00	Unfavourable	$        266,080.00	$            6,940.00	Favourable	$        273,020.00

• Working for above

	Actual Costs	Flexible Budget	Planning/Static Budget
Machine hour activity	14000	14000	16000
Utilities	21120	=16600+(14000 machine hours x $0.17)	=16600+(16000 machine hours x $0.17)
Maintenance	49800	=38400+(14000 machine hours x $1.1)	=38400+(16000 machine hours x $1.1)
Supplies	9400	=14000 machine hours x $0.6	=16000 machine hours x $0.6
Indirect Labor	120600	=94100+(14000 machine hours x $1.6)	=94100+(16000 machine hours x $1.6)
Depreciation	70100	68400	68400