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	$16,700 + $0.12 per machine-hour	$	20,420
Maintenance	$38,600 + $1.40 per machine-hour	$	54,800
Supplies	$0.30 per machine-hour	$	4,600
Indirect labor	$94,400 + $1.10 per machine-hour	$	112,900
Depreciation	$68,500	$	70,200

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

Answer 1 - Activity variances for March

	Budgeted Costs in March for 16000 units	Budgeted Costs in March for 14000 units	Activity variances
Utilities	$                                                             18,620	$                                                             18,380	$                      240	F
Maintenance	$                                                             61,000	$                                                             58,200	$                   2,800	F
Supplies	$                                                                4,800	$                                                                4,200	$                      600	F
Indirect labor	$                                                           112,000	$                                                           109,800	$                   2,200	F
Depreciation	$                                                             68,500	$                                                             68,500	$                          -	F
Total	$                                                           264,920	$                                                           259,080	$                   5,840	F

Answer 2 - Spending variances for March.For above part, machine hours are taken as 16,000 hours.

	Budgeted Costs in March	Actual Cost in March	Activity variances
Utilities	$                              18,380	$                      20,420	$                  2,040	U
Maintenance	$                              58,200	$                      54,800	$                  3,400	F
Supplies	$                                4,200	$                        4,600	$                     400	U
Indirect labor	$                            109,800	$                    112,900	$                  3,100	U
Depreciation	$                              68,500	$                      70,200	$                  1,700	U
Total	$                            259,080	$                    262,920	$                  3,840	U

For the above part, machine hours are taken as 14,000 hours.

In case of any doubt, please comment.