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	$17,000 + $0.13 per machine-hour	$	21,140
Maintenance	$38,500 + $1.60 per machine-hour	$	61,100
Supplies	$0.30 per machine-hour	$	5,200
Indirect labor	$94,800 + $1.30 per machine-hour	$	119,100
Depreciation	$68,300	$	70,000

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.

2. Calculate the spending variances for March.

Answer 1

• [1]

	Activity Variance
	[D = Difference between C & E]
Utilities	$260	F
Maintenance	$3,200	F
Supplies	$600	F
Indirect Labor	$2,600	F
Depreciation	$0	None
Total Expenses	$6,660	Favourable

• [2]

	Spending Variance
	[B = Difference between A & C]
Utilities	$2,060	U
Maintenance	$3,000	F
Supplies	$400	U
Indirect Labor	$3,500	U
Depreciation	$1,700	U
Total Expenses	$4,660	U

• Working

							Actual result	Flexible Budget	Planning Budget
Machine hours							16,000	16,000	18,000
							[A]	[C = Fixed + (Var x Actual units)]	[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$17,000	+(	$                  0.13	x	16000 or 18000	)	$21,140	$19,080	$19,340
Maintenance	$38,500	+(	$                  1.60	x	16000 or 18000	)	$61,100	$64,100	$67,300
Supplies	$0	+(	$                  0.30	x	16000 or 18000	)	$5,200	$4,800	$5,400
Indirect Labor	$94,800	+(	$                  1.30	x	16000 or 18000	)	$119,100	$115,600	$118,200
Depreciation	$68,300	+(	$                      -	x	16000 or 18000	)	$70,000	$68,300	$68,300
Total Expenses	$218,600	+(	$3	x	16000 or 18000	)	$276,540	$271,880	$278,540