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	$16,400 + $0.11 per machine-hour	$	20,070
Maintenance	$38,900 + $1.50 per machine-hour	$	58,200
Supplies	$0.50 per machine-hour	$	8,300
Indirect labor	$94,900 + $1.60 per machine-hour	$	123,000
Depreciation	$68,400	$	70,100

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

Answer

Activity variances for March

Particulars	Planning Budget	Flexible Budget	Activity Variance
Machine Hours (q)	17,000	15,000
Utilities 16400+(0.11*q)	$ 18,270	$ 18,050	$                    220	Favourable
Maintenance 38900+(1.50*q)	$ 64,400	$ 61,400	$                 3,000	Favourable
Supplies (0.50*q)	$ 8,500	$ 7,500	$                 1,000	Favourable
Indirect Labour 94900+(1.60*q)	$ 122,100	$ 118,900	$                 3,200	Favourable
Depreciation	$ 68,400	$ 68,400	$                       -	Favourable
Total	$ 281,670	$ 274,250	$                 7,420	Favourable

Spending variances for March.

Particulars	Flexible Budget	Actual Results	Spending Variance
Machine Hours (q)	15,000.00	15,000.00
Utilities 16600+(0.15*q)	$         18,050.00	$      20,070.00	$              (2,020.00)	Unfavourable
Maintenance 38200+(1.80*q)	$         61,400.00	$      58,200.00	$                3,200.00	Favourable
Supplies (0.50*q)	$          7,500.00	$        8,300.00	$                 (800.00)	Unfavourable
Indirect Labour 94200+(1.70*q)	$       118,900.00	$    123,000.00	$              (4,100.00)	Unfavourable
Depreciation	$         68,400.00	$      70,100.00	$              (1,700.00)	Unfavourable
Total	$       274,250.00	$    279,670.00	$              (5,420.00)	Unfavourable

In case of any doubt, please comment.