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	$	21,600
Maintenance	$38,900 + $1.60 per machine-hour	$	61,500
Supplies	$0.60 per machine-hour	$	10,600
Indirect labor	$94,300 + $1.60 per machine-hour	$	124,000
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

Answer-1)-

FAB Corporation
Activity Variance for the month of March 31
Particulars	Planning Budget	Flexible Budget	Difference	Remark
	$	$	$
Utilities	$16200+(18000 machine hours*$0.20 per hour)= $19800	$16200+(16000 machine hours*$0.20 per hour)= $19400	400	Favorable
Maintenance	$38900+(18000 machine hours*$1.60 per hour)= $67700	$38900+(16000 machine hours*$1.60 per hour)= $64500	3200	Favorable
Supplies	18000 machine hours*$0.60 per hour= $10800	16000 machine hours*$0.60 per hour= $9600	1200	Favorable
Indirect Labor	$94300+(18000 machine hours*$1.60 per hour)= $123100	$94300+(16000 machine hours*$1.60 per hour)= $119900	3200	Favorable
Depreciation	$68300	$68300	0	None
Totals	289700	281700	8000	Favorable

2)-

FAB Corporation
Spending variance for the month of March 31
Particulars	Flexible Budget	Actual	Difference	Remark
	$	$	$
Utilities	$16200+(16000 machine hours*$0.20 per hour)= $19400	21600	-2200	Unfavorable
Maintenance	$38900+(16000 machine hours*$1.60 per hour)= $64500	61500	3000	Favorable
Supplies	16000 machine hours*$0.60 per hour= $9600	10600	-1000	Unfavorable
Indirect Labor	$94300+(16000 machine hours*$1.60 per hour)= $119900	124000	-4100	Unfavorable
Depreciation	$68300	70000	-1700	Unfavorable
Totals	281700	287700	-6000	Unfavorable