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 $16,800 plus $0.18 per machine-hour $38,000 plus $1.50 per machine-hour $0.40 per machine-hour $94,200 plus $2.00 per machine-hour $67,900 Actual Cost in March $ 21,840 $ 58,800 $ 7,000 $131,100 $ 69,600 During March, the company worked 16,000 machine-hours and produced 10,000 units. The company had originally planned to work 18,000 machine-hours during March. Required: 1. Calculate the activity variances for March. 2. Calculate the spending variances for March. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Calculate the spending variances for March. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect i.e., zero variance). Input all amounts as positive values.) FAB Corporation Spending Variances For the Month Ended March 31 Utilities Maintenance Supplies Indirect labor Depreciation Total

Answer 1

Requirement 1

Activity variances are the difference between planning and flexible budget.

                                                                                FAB corporation

                                                                                Activity variances

                                                                                For the month ended March 31

	Planning budget	Flexible budget	Activity variances
Machine hours(x)	18,000	16,000
Utilities (16800+0.18x)	20,040	19,680	360 F
Maintenance (38000+1.50x)	65,000	62,000	3000 F
Supplies(0.40x)	7,200	6,400	800 F
Indirect labor(94200+2x)	130,200	126,200	4000 F
Depreciation	67,900	67,900	0
Total	290,340	282,180	8160 F

Activity variances are all favorable because actual activity was less than planned activity. Hence, variable costs are lower than planned in the original budget.

Requirement 2

Spending variance is the difference between flexible budget and actual budget. The variances favorable are noted as F and unfavorable variances as U. Favorable spending variances results when actual expenditure is lower than expected. Unfavorable spending variance results when actual expenditures are higher than expected.

                                                                                FAB corporation

                                                                                Spending variances

                                                                                For the month ended March 31

	Actual Budget (as given)	Flexible budget (from requirement 1)	Spending variances
Machine hours(x)	16,000	16,000
Utilities (16800+0.18x)	21,840	19,680	2160 U
Maintenance (38000+1.50x)	58,800	62,000	3200 F
Supplies(0.40x)	7,000	6,400	600 U
Indirect labor(94200+2x)	131,100	126,200	4900 U
Depreciation	69,600	67,900	1700 U
Total	288,340	282,180	6160 U

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