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: Utilities Maintenance Supplies Indirect labor Depreciation Cost Formula $16,400 plus $0.16 per machine-hour $38,900 plus $1.20 per machine-hour $0.80 per machine-hour $94,500 plus $1.80 per machine-hour $68,000 Actual Cost in March $ 22,200 $ 62,700 $ 19,800 $ 140,400 $ 69,700 During March, the company worked 23,000 machine-hours and produced 17,000 units. The company had originally planned to work 25,000 machine-hours during March. Required: 1. Calculate the activity variances for March. 2. Calculate the spending variances for March.

Answer 1

1. Activity Variance = Actual Result - Flexible Budget

	Flexible Budget		Actual	Activity
	23000 hours			Variance
Utilities	$          20,080	=16400+23000*0.16	$            22,200	$            2,120	U
Maintenance	$          66,500	=38900+23000*1.2	$            62,700	$          -3,800	F
Supplies	$          18,400	=23000*0.8	$            19,800	$            1,400	U
Indirect Labor	$       1,35,900	=94500+23000*1.8	$        1,40,400	$            4,500	U
Depreciation	$          68,000	68000	$            69,700	$            1,700	U

2. Spending Variance = Actual Results - Static Budget

	Static Budget		Actual	Spending
	25000 hours			Variance
Utilities	$          20,400	=16400+25000*0.16	$            22,200	$            1,800	U
Maintenance	$          68,900	=38900+25000*1.2	$            62,700	$          -6,200	F
Supplies	$          20,000	=25000*0.8	$            19,800	$             -200	F
Indirect Labor	$       1,39,500	=94500+25000*1.8	$        1,40,400	$               900	U
Depreciation	$          68,000	68000	$            69,700	$            1,700	U