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	$16,000 plus $0.14 per machine-hour	$	21,300
Maintenance	$38,600 plus $1.50 per machine-hour	$	69,900
Supplies	$0.60 per machine-hour	$	14,800
Indirect labor	$94,300 plus $2.00 per machine-hour	$	145,200
Depreciation	$68,400	$	70,100

During March, the company worked 23,000 machine-hours and produced 17,000 units. The company had originally planned to work 25,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Activity Variance
Particulars	Planning Budget	Flexible Budget	Activity Variance
Machine Hours	25000	23000
Utilities	19500	19220	280	F
	[16000+(0.14*25000)]	[16000+(0.14*23000)]	(19500 - 19220)
Maintenance	76100	73100	3000	F
	[38600+(1.5*25000)]	[38600+(1.5*23000)]	(76100 -73100)
Supplies	15000	13800	1200	F
	(0.60*25000)	(0.60*23000)	(15000 -13800)
Indirect Labor	144300	140300	4000	F
	94300+(2*25000)	94300+(2*23000)	(144300 - 140300)
Depreciation	68400	68400	0	No Effect
Total	323300	314820	8480	F

Spending Variance
Particulars	Flexible Budget	Actual Results	Spending Variance
Machine Hours	23000	23000
Utilities	19220	21300	2080	U
	[16000+(0.14*23000)]		(21300 - 19220)
Maintenance	73100	69900	(3200)	F
	[38600+(1.5*23000)]		(73100 - 69900)
Supplies	13800	14800	1000	U
	(0.60*23000)		(14800 - 13800)
Indirect Labor	140300	145200	4900	U
	94300+(2*23000)		(145200 - 140300)
Depreciation	68400	70100	1700	U
			(70100-68400)
Total	314820	321300	6480	U