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 $16,800 plus $0.18 per machine-hour $ 21,840 Maintenance $38,000 plus $1.50 per machine-hour $ 58,800 Supplies $0.40 per machine-hour $ 7,000 Indirect labor $94,200 plus $2.00 per machine-hour $ 131,100 Depreciation $67,900 $ 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.

Answer 1

A).

FAB CORPORATION

Activity Variance

For the Month Ended March 31

Particulars	Amount	Favourable / Unfavourable
Utilities	$ 360	F
Maintenance	$ 3,000	F
Supplies	$ 800	F
Indirect Labour	$ 4,000	F
Depreciation	0	None
Total	$ 8,160	F

Explanation;

Computation of the Activity Variance are Shown Below

FAB CORPORATION

Activity Variance

For the Month Ended March 31

	Flexible Budget	Planning Budget	Activity Variance
Machine Hour	16,000	18,000
Utilities ($16,800 + $0.18q)	$ 19,680	$ 20,040	$ 360 F
Maintenance ($38,000 +$ 1.50q)	$ 62,000	$ 65,000	$ 3,000 F
Supplies ($ 0.40 q)	$ 6,400	$ 7,200	$ 800 F
Indirect Labour ($94,200 + $2q)	$ 126,200	$ 130,200	$ 4,000 F
Depreciation ($67,900)	$ 67,900	$ 67,900	0 None
Total	$ 282,180	$ 288,340	$ 8,160 F

B).

FAB CORPORATION

Spending Variance

For the Month Ended March 31

Particulars	Amount	Favourable / Unfavourable
Utilities	$ 2,160	U
Maintenance	$ 3,200	F
Supplies	$ 600	U
Indirect Labour	$ 4,900	U
Depreciation	$ 1,700	U
Total	$ 6,160	U

Computation ;

The Spending Variance are calculated below;

FAB CORPORATION

Spending Variance

For the Month Ended March 31

	Actual Result	Flexible Budget	Spending Variance
Machine Hour	16,000	16,000
Utilities ($16,800+ $.18)	$ 21,840	$ 19,680	$ 2,160 U
Maintenance ($38,000 + $ 1.50)	$ 58,800	$ 62,000	$ 3,200 F
Supplies ($.40 per machine hour)	$ 7,000	$ 6,400	$ 600 U
Indirect Labour ($ 94,200 + 2 q)	$ 131,100	$ 126,200	$ 4,900 U
Depreciation ($ 67,900)	$ 69,600	$ 67,900	$ 1,700 U
Total	$ 288,340	$ 282,180	$ 6,160 U