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	$16,900 plus $0.13 per machine-hour	$	20,650
Maintenance	$38,800 plus $1.20 per machine-hour	$	50,600
Supplies	$0.60 per machine-hour	$	8,800
Indirect labor	$94,300 plus $1.90 per machine-hour	$	123,700
Depreciation	$67,700	$	69,400

During March, the company worked 13,000 machine-hours and produced 7,000 units. The company had originally planned to work 15,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March

Answer 1

Answers

• [1]

	Activity Variance
Utilities	$                260.00	Favourable
Maintenance	$            2,400.00	Favourable
Supplies	$            1,200.00	Favourable
Indirect Labor	$            3,800.00	Favourable
Depreciation	$                         -	None
Total Expenses	$            7,660.00	Favourable

• [2]

	Spending Variance
Utilities	$         2,060.00	Unfavourable
Maintenance	$         3,800.00	Favourable
Supplies	$         1,000.00	Unfavourable
Indirect Labor	$         4,700.00	Unfavourable
Depreciation	$         1,700.00	Unfavourable
Total Expenses	$         5,660.00	Unfavourable

• Working

							Flexible Budget	Planning Budget
Machine hours							13,000	15,000
Utilities		$      16,900.00	+ (	$      0.13	13,000 or 15000	)	$             18,590.00	$          18,850.00
Maintenance		$      38,800.00	+	$      1.20	13,000 or 15000	)	$             54,400.00	$          56,800.00
Supplies		$                      -	+	$      0.60	13,000 or 15000	)	$               7,800.00	$             9,000.00
Indirect Labor		$      94,300.00	+	$      1.90	13,000 or 15000	)	$           119,000.00	$        122,800.00
Depreciation		$      67,700.00	)	$           -	13,000 or 15000		$             67,700.00	$          67,700.00
Total Expenses							$           267,490.00	$        275,150.00