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 + $0.18 per machine-hour $ 22,560 Maintenance $38,400 + $1.40 per machine-hour $ 63,000 Supplies $0.90 per machine-hour $ 19,600 Indirect labor $94,900 + $2.00 per machine-hour $ 139,800 Depreciation $67,900 $ 69,600 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

1. Calculation of activity variances for March:

FAB Corporation
Activity Variances for the month of March
	Flexible Budget	Planning Budget	Activity Variances
Machine Hours	20,000	22,000
Utilities	$20,400 ($16,800 + $0.18 * 20,000)	$20,760 ($16,800 + $0.18 * 22,000)	$360	F
Maintenance	$66,400 ($38,400 + $1.4 * 20,000)	69200 ($38,400 + $1.4 * 22,000)	$2,800	F
Supplies	$18,000 ($0.9 * 20,000)	$19,800 ($0.9 * 22,000)	$1,800	F
Indirect Labor	$134,900 ($94,900 + $2 * 20,000)	$138,900 ($94,900 + $2 * 22,000)	$4,000	F
Depreciation	$67,900	$67,900	0	No effect
Total Expense	$307,600	$316,560	$8,960	F

2. Calculation of spending variances for March:

FAB Corporation
Spending Variances for the month of March
	Actual Results (Given)	Flexible Budget (From above)	Spending Variances
Machine Hours	20,000	20,000
Utilities	$22,560	$20,400	$2,160	U
Maintenance	$63,000	$66,400	$3,400	F
Supplies	$19,600	$18,000	$1,600	U
Indirect Labor	$139,800	$134,900	$4,900	U
Depreciation	$69,600	$67,900	$1700	U
Total Expense	$314,560	$307,600	$6,960	U

F indicates Favorable Variance

U indicates Unfavorable Variance