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 $17,000 + $0.17 per machine-hour $ 22,540 Maintenance $38,400 + $1.90 per machine-hour $ 74,000 Supplies $0.40 per machine-hour $ 8,600 Indirect labor $94,700 + $1.40 per machine-hour $ 126,400 Depreciation $67,700 $ 69,400 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

• Workings

							Actual result	Spending Variance		Flexible Budget	Activity Variance		Planning Budget
Machine hours							20,000			20,000			22,000
							[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$17,000	+(	$                  0.17	x	20000 or 22000	)	$22,540	$2,140	U	$20,400	$340	F	$20,740
Maintenance	$38,400	+(	$                  1.90	x	20000 or 22000	)	$74,000	$2,400	F	$76,400	$3,800	F	$80,200
Supplies	$0	+(	$                  0.40	x	20000 or 22000	)	$8,600	$600	U	$8,000	$800	F	$8,800
Indirect Labor	$94,700	+(	$                  1.40	x	20000 or 22000	)	$126,400	$3,700	U	$122,700	$2,800	F	$125,500
Depreciation	$67,700	+(	$                      -	x	20000 or 22000	)	$69,400	$1,700	U	$67,700	$0	None	$67,700
Total Expenses	$217,800	+(	$4	x	20000 or 22000	)	$300,940	$5,740	U	$295,200	$7,740	Favourable	$302,940

• [1]

	Activity Variance
Utilities	$340	F
Maintenance	$3,800	F
Supplies	$800	F
Indirect Labor	$2,800	F
Depreciation	$0	None
Total Expenses	$7,740	Favourable

• [2]

	Spending Variance
Utilities	$2,140	U
Maintenance	$2,400	F
Supplies	$600	U
Indirect Labor	$3,700	U
Depreciation	$1,700	U
Total Expenses	$5,740	U

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Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Revenues occurs when:

>Actual revenues are MORE than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are MORE than Static/Planned budget revenues [Activity Variance]

* Unfavourable Variance in case of Revenues occurs when:

>Actual revenues are LESS than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are LESS than Static/Planned budget revenues [Activity Variance]

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]