Question

Item 3

Item 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	$16,300 plus $0.11 per machine-hour	$	19,860
Maintenance	$38,800 plus $1.80 per machine-hour	$	61,400
Supplies	$0.60 per machine-hour	$	9,400
Indirect labor	$94,800 plus $1.80 per machine-hour	$	124,500
Depreciation	$67,600	$	69,300

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

FAB Corporation
Activity Variance [Refer working note 1]
For the month ended March 31
Utilities	$220	F
Maintenance	$3,600	F
Supplies	$1,200	F
Indirect labor	$3,600	F
Depreciation	$0	None
Total	$8,620	F
FAB Corporation
Spending Variances [Refer working note 2]
For the month ended March 31
Utilities	$2,020	U
Maintenance	$2,600	F
Supplies	$1,000	U
Indirect labor	$4,500	U
Depreciation	$1,700	U
Total	$6,620	U

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Working note 1 - Activity Variance
	Planning Budget [Refer working note 3]	Flexible Budget [Refer working note 4]	Activity Variance [Planning budget - Flexible budget]
Utilities	$18,060	$17,840	$220	F
Maintenance	$67,600	$64,000	$3,600	F
Supplies	$9,600	$8,400	$1,200	F
Indirect labor	$123,600	$120,000	$3,600	F
Depreciation	$67,600	$67,600	$0	None
Total	$286,460	$277,840	$8,620	F

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Working note 2 - Spending Variances
	Actual results	Flexible Budget [Refer Working note 4]	Spending Variances [Actual Results - Flexible Budget]
Utilities	$19,860	$17,840	$2,020	U
Maintenance	$61,400	$64,000	$2,600	F
Supplies	$9,400	$8,400	$1,000	U
Indirect labor	$124,500	$120,000	$4,500	U
Depreciation	$69,300	$67,600	$1,700	U
Total	$284,460	$277,840	$6,620	U

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Working note 3 - Planning budget
Utilities                    [Fixed cost + Variable cost = [$16,300 + ($16,000 hours x $0.11)]	$18,060
Maintenance             [Fixed cost + Variable cost = [$38,800 + ($16,000 hours x $1.80)]	$67,600
Supplies                   [Variable cost = 16,000 hours x $0.60)]	$9,600
Indirect labor           [Fixed cost + Variable cost = [$94,800 + ($16,000 hours x $1.80)]	$123,600
Depreciation            [Fixed cost]	$67,600
Total	$286,460

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Working note 4 - Flexible budget
Utilities                    [Fixed cost + Variable cost = [$16,300 + ($14,000 hours x $0.11)]	$17,840
Maintenance             [Fixed cost + Variable cost = [$38,800 + ($14,000 hours x $1.80)]	$64,000
Supplies                   [Variable cost = 14,000 hours x $0.60)]	$8,400
Indirect labor           [Fixed cost + Variable cost = [$94,800 + ($14,000 hours x $1.80)]	$120,000
Depreciation            [Fixed cost]	$67,600
Total	$277,840