Question

Problem 9-20 Activity and Spending Variances [LO9-1, LO9-2, LO9-3]

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 plus $0.18 per machine-hour	$	21,080
Maintenance	$38,600 plus $2.10 per machine-hour	$	66,000
Supplies	$0.80 per machine-hour	$	12,600
Indirect labor	$94,900 plus $2.00 per machine-hour	$	127,800
Depreciation	$68,400	$	70,100

During March, the company worked 14,000 machine-hours and produced 8,000 units. The company had originally planned to work 16,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

1. Activity Variance

FAB Corporation Activity Variances For the Month ended March 31
Utilities	$360	F
Maintenance	$4,200	F
Supplies	$1,600	F
Indirect Labor	$4,000	F
Depreciation	None
Total	$10,160	F

2. Spending Variances

FAB Corporation Spending Variances For the Month ended March 31
Utilities	$2,160	U
Maintenance	$2,000	F
Supplies	$1,400	U
Indirect Labor	$4,900	U
Depreciation	$1,700	U
Total	$8,160	U

Explanation:

1 Activity Variances

FAB Corporation Activity Variances For the month ended March 31
	Flexible Budget	Planning Budget	Activity Variances
Machine Hours (q)	14,000	16,000
Utilities ($16,400+$0.18q)	$18,920	$19,280	$360 F
Maintenance ($38,600+$2.10q)	$68,000	$72,200	$4,200 F
Supplies ($0.80q)	$11,200	$12,800	$1,600 F
Indirect labor ($94,900+$2.00q)	$122,900	$126,900	$4,000 F
Depreciation ($68,400)	$68,400	$68,400	None
Total	$289,420	$299,580	$10,160 F

2. Spending Variances

FAB Corporation Spending Variances For the month ended March 31
	Actual Result	Flexible Budget	Spending Variances
Machine Hours (q)	14,000	14,000
Utilities ($16,400+$0.18q)	$21,080	$18,920	$2,160 U
Maintenance ($38,600+$2.10q)	$66,000	$68,000	$2,000 F
Supplies ($0.80q)	$12,600	$11,200	$1,400 U
Indirect labor ($94,900+$2.00q)	$127,800	$122,900	$4,900 U
Depreciation ($68,400)	$70,100	$68,400	$1,700 U
Total	$297,580	$289,420	$8,160 U

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