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 $0.14 per machine-hour	$	20,840
Maintenance	$38,800 plus $1.50 per machine-hour	$	64,100
Supplies	$0.70 per machine-hour	$	14,500
Indirect labor	$94,500 plus $2.00 per machine-hour	$	137,400
Depreciation	$67,700	$	69,400

During March, the company worked 19,000 machine-hours and produced 13,000 units. The company had originally planned to work 21,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

			Activity variance = flexible budget - planned budget
					Flexible	planned	activity
					budget	Budget	variance
		machine hours			19,000	21,000
		fixed	variable
utilities		16,100	0.14		18760	19040	280	F
maintenance		38,800	1.5		67300	70300	3000	F
supplies			0.7		13300	14700	1400	F
indirect labor		94,500	2		132500	136500	4000	F
Depreciation		67,700			67,700	67,700	0	N
tota			4.34		299560	308240	8680	F
			cost formula = machine hours * variable cost per mh + fixed cost
			Spending variance = actual budget - flexible budget
					Flexible	Actual	Spending
					budget	Budget	variance
		machine hours			19,000	19,000
		fixed	variable
utilities		16,100	0.14		18760	20,840	2080	U
maintenance		38,800	1.5		67300	64,100	3,200	F
supplies			0.7		13300	14,500	1200	U
indirect labor		94,500	2		132500	137,400	4900	U
Depreciation		67,700			67,700	69,400	1,700	U
total			4.34		299560	306,240	6,680	U