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 + $0.21 per machine-hour	$	23,840
Maintenance	$38,500 + $1.20 per machine-hour	$	61,100
Supplies	$0.60 per machine-hour	$	14,200
Indirect labor	$94,900 + $1.40 per machine-hour	$	129,400
Depreciation	$67,800	$	69,500

During March, the company worked 22,000 machine-hours and produced 16,000 units. The company had originally planned to work 24,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Part 1) Activity Variances

An Activity variance is the difference between a revenue or cost item in the flexible budget and the same item in the static planning budget.

Particulars	Planned Budget	Flexible Budget	Activity Variance	Remark
Machine Hours	24000	22000
Utilities	22040	21620	420	Favourable
Maintenance	67300	64900	2400	Favourable
Supplies	14400	13200	1200	Favourable
Indirect Labour	128500	125700	2800	Favourable
Depreciation	67800	67800	0
Total	300040	293220	6820	Favourable

Part 2) Spending Variances

A Spending variance is the difference between the actual amount and flexible budget.

Particulars	Flexible Budget	Actual	Spending Variance	Remark
Machine Hours	22000	22000
Utilities	21620	23840	-2220	Unfavourable
Maintenance	64900	61100	3800	Favourable
Supplies	13200	14200	-1000	Unfavourable
Indirect Labour	125700	129400	-3700	Unfavourable
Depreciation	67800	69500	-1700	Unfavourable
Total	293220	298040	-4820	Unfavourable