Question

ou 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	$16,700 plus $0.16 per machine-hour	$	21,220
Maintenance	$38,500 plus $2.10 per machine-hour	$	68,000
Supplies	$0.40 per machine-hour	$	6,600
Indirect labor	$94,200 plus $2.00 per machine-hour	$	129,100
Depreciation	$67,600	$	69,300

During March, the company worked 15,000 machine-hours and produced 9,000 units. The company had originally planned to work 17,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

• [1]

	Activity Variance
	[D = Difference between C & E]
Utilities	$320	F
Maintenance	$4,200	F
Supplies	$800	F
Indirect Labor	$4,000	F
Depreciation	$0	None
Total Expenses	$9,320	Favourable

• [2]

	Spending Variance
	[B = Difference between A & C]
Utilities	$2,120	U
Maintenance	$2,000	F
Supplies	$600	U
Indirect Labor	$4,900	U
Depreciation	$1,700	U
Total Expenses	$7,320	U

• Working

							Actual result	Flexible Budget	Planning Budget
Machine hours							15,000	15,000	17,000
							[A]	[C = Fixed + (Var x Actual units)]	[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$16,700	+(	$                  0.16	x	15000 or 17000	)	$21,220	$19,100	$19,420
Maintenance	$38,500	+(	$                  2.10	x	15000 or 17000	)	$68,000	$70,000	$74,200
Supplies	$0	+(	$                  0.40	x	15000 or 17000	)	$6,600	$6,000	$6,800
Indirect Labor	$94,200	+(	$                  2.00	x	15000 or 17000	)	$129,100	$124,200	$128,200
Depreciation	$67,600	+(	$                      -	x	15000 or 17000	)	$69,300	$67,600	$67,600
Total Expenses	$217,000	+(	$5	x	15000 or 17000	)	$294,220	$286,900	$296,220

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 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]