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	$16,800 + $0.20 per machine-hour	$	23,000
Maintenance	$38,500 + $1.30 per machine-hour	$	60,900
Supplies	$0.40 per machine-hour	$	8,600
Indirect labor	$94,300 + $1.10 per machine-hour	$	119,400
Depreciation	$68,200	$	69,900

During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

FAB Corporation
Activity Variance
For the month ended March 31
		Planning Budget	Flexible Budget	Activity Variance
Machine hours	(q)	22,000	20,000
Utilities	[$16800 + ($0.20 X q)]	$     21,200	$       20,800	$          400	F
Maintenance	[$38500 + ($1.30 X q)]	$     67,100	$       64,500	$      2,600	F
Supplies	($0.40 X q)	$       8,800	$         8,000	$          800	F
Indirect Labour	[$94300 + ($1.10 X q)]	$ 1,18,500	$   1,16,300	$      2,200	F
Depreciation	$                             68,200	$     68,200	$       68,200	$           0	None
Total		$ 2,83,800	$   2,77,800	$      6,000	F
FAB Corporation
Spending Variance
For the month ended March 31
		Flexible Budget	Actual results	Spending Variances
Machine hours	(q)	20,000	20,000
Utilities	[$16800 + ($0.20 X q)]	20,800	$       23,000	$      2,200	U
Maintenance	[$38500 + ($1.30 X q)]	64,500	$       60,900	$      3,600	F
Supplies	($0.40 X q)	8,000	$         8,600	$          600	U
Indirect Labour	[$94300 + ($1.10 X q)]	1,16,300	$   1,19,400	$      3,100	U
Depreciation	$                             68,200	68,200	$       69,900	$      1,700	U
Total		$ 2,77,800	$   2,81,800	$      4,000	U