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	$16,400 + $0.18 per machine-hour	$	22,700
Maintenance	$38,500 + $1.80 per machine-hour	$	77,300
Supplies	$0.50 per machine-hour	$	12,300
Indirect labor	$94,700 + $1.90 per machine-hour	$	143,100
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

Solution:

Activity variance:

Particulars	Planning budget	Flexible budget	Activity variance
Machine hours (a)	25,000	23,000
Utilities $16,400 +(0.18 *a)	20,900	20,540	360	Favorable
Maintenance $38,500 +(1.80*a)	83,500	79,900	3,600	Favorable
Supplies (0.50*a)	12,500	11,500	1,000	Favorable
Indirect labor $94,700 +(1.90*a)	142,200	138,400	3,800	Favorable
Depreciation	68,400	68,400	0	Favorable
Total	327,500	318,740	8,760	Favorable

Spending variance:

Particulars	Flexible budget	Actual results	Activity variance
Machine hours (a)	23,000	23,000
Utilities $16,400 +(0.18 *a)	20,540	22,700	(2,160)	Unfavorable
Maintenance $38,500 +(1.80*a)	79,900	77,300	2,600	Favorable
Supplies (0.50*a)	11,500	12,300	(800)	Unfavorable
Indirect labor $94,700 +(1.90*a)	138,400	143,100	(4,700)	Unfavorable
Depreciation	68,400	70,100	(1,700)	Unfavorable
Total	318,740	325,500	(6,760)	Unfavorable

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