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	$16,800 plus $0.21 per machine-hour	$	23,640
Maintenance	$38,600 plus $1.90 per machine-hour	$	78,000
Supplies	$0.70 per machine-hour	$	16,600
Indirect labor	$94,100 plus $1.30 per machine-hour	$	126,200
Depreciation	$67,700	$	69,400

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

			Activity variance = flexible budget - planned budget
					Flexible	planned	activity
					budget	Budget	variance
		machine hours			22,000	24,000
		fixed	variable
utilities		16,800	0.21		21420	21840	420	F
maintenance		38,600	1.9		80400	84200	3800	F
supplies			0.7		15400	16800	1400	F
indirect labor		94,100	1.3		122700	125300	2600	F
Depreciation		67,700			67,700	67,700	0	N
tota			4.11		307620	315840	8220	F
			cost formula = machine hours * variable cost per mh + fixed cost
			Spending variance = actual budget - flexible budget
					Flexible	Actual	Spending
					budget	Budget	variance
		machine hours			22,000	22,000
		fixed	variable
utilities		16,800	0.21		21420	23,640	2220	U
maintenance		38,600	1.9		80400	78,000	2,400	F
supplies			0.7		15400	16,600	1200	U
indirect labor		94,100	1.3		122700	126,200	3500	U
Depreciation		67,700			67,700	69,400	1,700	U
tota			4.11		307620	313,840	6,220	U