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	$16,300 + $0.16 per machine-hour	$	21,780
Maintenance	$39,000 + $2.00 per machine-hour	$	78,800
Supplies	$0.70 per machine-hour	$	15,900
Indirect labor	$94,700 + $1.40 per machine-hour	$	127,800
Depreciation	$67,700	$	69,400

During March, the company worked 21,000 machine-hours and produced 15,000 units. The company had originally planned to work 23,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Solution :

1. Computation of  activity variances are shown as below :

FAB Corporation Activity variances For the Month ended March 31st
Particulars	Planning budget	Flexible budget	Activity variances
Machine hours (q)	23,000 hrs	21,000 hrs
Utilities ($ 16,300+ $ 0.16 q)	$ 19,980	$ 19,660	$ 320 F
Maintenance($ 39,000+$ 2.00 q)	$ 85,000	$ 81,000	$ 4000 F
Supplies ( $ 0.70q)	$ 16,100	$ 14,700	$ 1,400 F
Indirect labor ($ 94,700+ $ 1.40 q)	$ 1,26,900	$ 1,24,100	$ 2,800 F
Depreciation	$ 67,700	$ 67,700	0
Total	$ 3,15,680	$ 3,07,160	$ 8,520 F

2. Computation of spending variances are shown as below:

FAB corporation Spending variances For the Month Ended March 31st
Particulars	Flexible budget	Actual results (Given)	Spending variances
Machine hours (q)	21,000 hrs	21,000 hrs
Utilities ($ 16,300+ $ 0.16 q)	$ 19,660	$ 21,780	$ 2120 U
Maintenance($ 39,000+$ 2.00 q)	$ 81,000	$ 78,800	$ 2,200 F
Supplies ( $ 0.70 q)	$ 14,700	$ 15,900	$ 1,200 U
Indirect labor ($ 94,700+ $ 1.40 q)	$ 1,24,100	$ 1,27,800	$ 3,700 U
Depreciation	$ 67,700	$ 69,400	$ 1,700 U
Total	$ 3,07,160	$ 3,13,680	$ 6,520 U