Question

The Latiker commuter bus company uses two measures of activity, routes and commuters, in the cost formulas in its budgets and performance reports. The cost formula for bus operating costs is $56,850 per month plus $2,874 per route plus $14 per commuter. The company expected its activity in November to be 87 routes and 255 commuters, but the actual activity was 95 routes and 264 commuters. The actual cost for bus operating costs in November was $305,100. The spending variance for bus operating costs in November would be closest to:

Answer 1

Solution :

Computation of spending variance

Particulars	Computation	Amount in $
Number of routes as per actual	95 routes
Standard Cost per route	$ 2,874
Standard cost incurred for actual routes	95 routes *$ 2,874	$ 2,73,030
Number of commuters as per actual	264 commuters
Standard cost per commuter	$ 14
Standard cost incurred for actual commuters travelled	264 commuters *$ 14	$ 3,696
Standard Fixed cost	56,850 per month	$ 56,850
Actual operating cost incurred at standard rates (november)	$ 2,73,030 +$ 3696+ $ 56,850	$ 3,33,576

Actual operating cost incurred as per actual rates (November) = $ 3,05,100

Operating cost spending variance =( Actual operating cost at standard rates – Actual operating cost at

                                                               Actual rates)

Operating cost spending variance = $ 3,33,576 - $ 3,05,100

                                                          = $ 28,476 F (Favorable)

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