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	$16,200 + $0.16 per machine-hour	$	21,360
Maintenance	$38,600 + $1.90 per machine-hour	$	72,300
Supplies	$0.70 per machine-hour	$	14,500
Indirect labor	$94,100 + $1.90 per machine-hour	$	134,900
Depreciation	$68,000	$	69,700

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

1	Activity variances
		Actual Cost	Budgeted cost with Budgeted hours	Variance	Variance Remarks
	Utilities	21,360.00	=16200+0.16*21000	19,560	-1,800.00	Unfavourable
	Maintenance	72,300.00	=38600+1.90*21000	78,500	6,200.00	Favourable
	Supplies	14,500.00	= 0.70*21000	14,700	200.00	Favourable
	Indirect Labour	1,34,900.00	=94100+1.90*21000	1,34,000	-900.00	Unfavourable
	Depreciation	69,700.00	68,000	68,000	-1,700.00	Unfavourable
	In Activity variance, budgeted hours are used
2	Spending variances
		Actual Cost	Budgeted cost with actual hours	Variance	Variance Remarks
	Utilities	21,360.00	=16200+0.16*19000	19,240	-2,120.00	Unfavourable
	Maintenance	72,300.00	=38600+1.90*19000	74,700	2,400.00	Favourable
	Supplies	14,500.00	= 0.70*19000	13,300	-1,200.00	Unfavourable
	Indirect Labour	1,34,900.00	=94100+1.90*19000	1,30,200	-4,700.00	Unfavourable
	Depreciation	69,700.00	68,000	68,000	-1,700.00	Unfavourable
	In Spending variance, actual hours are used.