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	$16,200 plus $0.12 per machine-hour	$	20,400
Maintenance	$38,100 plus $1.10 per machine-hour	$	53,900
Supplies	$0.50 per machine-hour	$	9,800
Indirect labor	$94,500 plus $2.00 per machine-hour	$	135,400
Depreciation	$68,100	$	69,800

During March, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally planned to work 20,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

FAB Corporation
Activity Variances
	Flexible Budget	planning budget	activity variances
Machine Hours (q)	18,000	20,000
Utilities( 16,200 + 0.12 q)	18360	18600	-240
Maintenance(38,100 + 1.10q)	57900	60100	-2200
supplies (0.50q)	9000	10000	-1000
Indirect Labor (94500 + 2q)	130500	134500	-4000
Depreciation (68,100)	68100	68100	0
Total	283860	291300	-7440
FAB Corporation
Spending Variances
	Flexible Budget	Actual Results	Spending variances
Machine Hours (q)	18,000	18,000
Utilities( 16,200 + 0.12 q)	18360	20400	2040
Maintenance(38,100 + 1.10q)	57900	53900	-4000
supplies (0.50q)	9000	9800	800
Indirect Labor (94500 + 2q)	130500	135400	4900
Depreciation (68,100)	68100	69800	1700
Total	283860	289300	5440