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 $16,300 + $0.21 per machine-hour $ 21,670 Maintenance $38,800 + $1.40 per machine-hour $ 56,400 Supplies $0.40 per machine-hour $ 6,600 Indirect labor $94,100 + $1.60 per machine-hour $ 122,200 Depreciation $67,800 $ 69,500 During March, the company worked 15,000 machine-hours and produced 9,000 units. The company had originally planned to work 17,000 machine-hours during March. Required: 1. Calculate the activity variances for March. 2. Calculate the spending variances for March.

Answer 1

Activity Variances:- It is the difference between the revenue or cost items in the flexible budget and the same item in the static planning budget

1.Calculation of Activity Variances:-

Particulars	Flexible budget (1)	Planning budget (2)	Activity Variance (2)-(1)
Machine hours(q)	15000 hrs	17000 hrs
Utilities 16300+0.21q	19450	19870	$420 F
Maintanence 38800+1.4q	59800	62600	$2800F
Supplies 0.4q	6000	6800	$800F
Indirect labour 94100+1.6q	118100	121300	3200F
Depreciation	67800	67800	0

Spending Variance:

It is the difference between Actual cost and Expected (budgeted ) cost paid for an item .

2.Calculation of Spending variances:-

Particulars	Actual budget (1)	Flexible budget (2)	Spending Variances (2)-(1)
Machine hours	15000 hrs	15000hrs
Utilities	21670	19450	$2220 U
Maintenance	56400	59800	$3400 F
Supplies	6600	6000	$600 U
Indirect labour	122200	118100	$4100 U
Depreciation	69500	67800	$1700 U