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 + $0.20 per machine-hour	$	21,200
Maintenance	$38,700 + $2.00 per machine-hour	$	64,500
Supplies	$0.80 per machine-hour	$	12,600
Indirect labor	$95,000 + $1.10 per machine-hour	$	113,500
Depreciation	$68,500	$	70,200

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

• [1]

	Activity Variance
	[D = Difference between C & E]
Utilities	$400	F
Maintenance	$4,000	F
Supplies	$1,600	F
Indirect Labor	$2,200	F
Depreciation	$0	None
Total Expenses	$8,200	Favourable

• [2]

	Spending Variance
	[B = Difference between A & C]
Utilities	$2,200	U
Maintenance	$2,200	F
Supplies	$1,400	U
Indirect Labor	$3,100	U
Depreciation	$1,700	U
Total Expenses	$6,200	U

• Workings

							Actual result	Flexible Budget	Planning Budget
Machine hours							14,000	14,000	16,000
							[A]	[C = Fixed + (Var x Actual units)]	[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$16,200	+(	$                  0.20	x	14000 or 16000	)	$21,200	$19,000	$19,400
Maintenance	$38,700	+(	$                  2.00	x	14000 or 16000	)	$64,500	$66,700	$70,700
Supplies	$0	+(	$                  0.80	x	14000 or 16000	)	$12,600	$11,200	$12,800
Indirect Labor	$95,000	+(	$                  1.10	x	14000 or 16000	)	$113,500	$110,400	$112,600
Depreciation	$68,500	+(	$                      -	x	14000 or 16000	)	$70,200	$68,500	$68,500
Total Expenses	$218,400	+(	$4	x	14000 or 16000	)	$282,000	$275,800	$284,000

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]