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 + $0.15 per machine-hour	$	20,900
Maintenance	$38,400 + $1.80 per machine-hour	$	64,600
Supplies	$0.40 per machine-hour	$	7,000
Indirect labor	$94,300 + $1.90 per machine-hour	$	129,400
Depreciation	$68,400	$	70,100

During March, the company worked 16,000 machine-hours and produced 10,000 units. The company had originally planned to work 18,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

	FAB Corporation Activity Variances For the Month Ended March 31 Utilities    Maintenance Supplies Indirect labor Depreciation Total

2. Calculate the spending variances for March.

	FAB Corporation Spending Variances For the Month Ended March 31 Utilities       Maintenance Supplies Indirect labor Depreciation Total

Answer 1

Activity Variance:

Particulars	Planning Budget	Flexible Budget	Activity Variance
Machine Hours (a)	18000	16000
Utilities 16400+(0.15*a)	19100	18800	300	Favorable
Maintenance 38400+(1.80*a)	70800	67200	3600	Favorable
Supplies (0.40*a)	7200	6400	800	Favorable
Indirect Labor 94300+(1.90*a)	128500	124700	3800	Favorable
Depreciation	68400	68400	0	Favorable
Total	294000	285500	8500	Favorable

Spending Variance:

Particulars	Flexible Budget	Actual Results	Spending Variance
Machine Hours (a)	16000	16000
Utilities 16400+(0.15*a)	18800	20900	-2100	Unfavorable
Maintenance 38400+(1.80*a)	67200	64600	2600	Favorable
Supplies (0.40*a)	6400	7000	-600	Unfavorable
Indirect Labor 94300+(1.90*a)	124700	129400	-4700	Unfavorable
Depreciation	68400	70100	-1700	Unfavorable
Total	285500	292000	-6500	Unfavorable