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	$16,200 + $0.20 per machine-hour	$	22,600
Maintenance	$38,300 + $1.20 per machine-hour	$	59,700
Supplies	$0.70 per machine-hour	$	15,900
Indirect labor	$94,300 + $1.20 per machine-hour	$	122,800
Depreciation	$67,800	$	69,500

During March, the company worked 21,000 machine-hours and produced 15,000 units. The company had originally planned to work 23,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Answer-1)-

FAB Corporation
Activity Variance for the month of March 31
Particulars	Planning Budget	Flexible Budget	Difference	Remark
	$	$	$
Utilities	16200+(23000 machine hours*0.20 per hour)=20800	16200+(21000 machine hours*0.20 per hour)=20400	400	Favorable
Maintenance	38300+(23000 machine hours*1.20 per hour)=65900	38300+(21000 machine hours*1.20 per hour)=63500	2400	Favorable
Supplies	23000 machine hours*0.70 per hour=16100	21000 machine hours*0.70 per hour=14700	1400	Favorable
Indirect Labor	94300+(23000 machine hours*1.20 per hour)=121900	94300+(21000 machine hours*1.20 per hour)=119500	2400	Favorable
Depreciation	67800	67800	0	None
Total	292500	285900	6600	Favorable

2)-

FAB Corporation
Spending variance for the month of March 31
Particulars	Flexible Budget	Actual	Difference	Remark
	$	$	$
Utilities	16200+(21000 machine hours*0.20 per hour)=20400	22600	-2200	Unfavorable
Maintenance	38300+(21000 machine hours*1.20 per hour)=63500	59700	3800	Favorable
Supplies	21000 machine hours*0.70 per hour=14700	15900	-1200	Unfavorable
Indirect Labor	94300+(21000 machine hours*1.20 per hour)=119500	122800	-3300	Unfavorable
Depreciation	67800	69500	-1700	Unfavorable
Total	285900	290500	-4600	Unfavorable