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	$16,600 plus $0.15 per machine-hour	$	21,100
Maintenance	$38,000 plus $2.00 per machine-hour	$	67,800
Supplies	$0.90 per machine-hour	$	16,000
Indirect labor	$94,200 plus $1.50 per machine-hour	$	122,100
Depreciation	$68,000	$	69,700

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

Part 1

The activity variances are shown below:

FAB Corporation Activity Variances For the Month Ended March 31
	Flexible Budget	Planning Budget	Activity Variances
Machine-hours (q)		16000		18000
Utilities ($16600 + $0.15q)	$	19000	$	19300	$	300	F
Maintenance ($38000 + $2.00q)		70000		74000		4000	F
Supplies ($0.90q)		14400		16200		1,800	F
Indirect labor ($94200 + $1.50q)		118200		121200		3,000	F
Depreciation ($68000)		68000		68000		0	None
Total	$	289600	$	298700	$	9100	F

Part 2

The spending variances are computed below:

FAB Corporation Spending Variances For the Month Ended March 31
	Actual Results	Flexible Budget	Spending Variances
Machine-hours (q)		16000		16000
Utilities ($16,600 + $0.15q)	$	21100	$	19000	$	2100	U
Maintenance ($38,000 + $2.00q)		67800		70000		2200	F
Supplies ($0.90q)		16000		14400		1600	U
Indirect labor ($94,200 + $1.50q)		122100		118200		3900	U
Depreciation ($68000)		69700		68000		1700	U
Total	$	296700	$	289600	$	7100	U