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 $0.14 per machine-hour	$	21,820
Maintenance	$39,000 plus $2.00 per machine-hour	$	78,800
Supplies	$0.40 per machine-hour	$	9,000
Indirect labor	$94,700 plus $1.90 per machine-hour	$	139,300
Depreciation	$68,400	$	70,100

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

1) Activity variance

Utilities (2000*.14)	280 F
Maintenance (2000*2)	4000 F
Supplies (2000*.40)	800 F
Indirect labor (2000*1.9)	3800 F
Depreciation	0 None
Total	8880 F

2) Spending variance

Utilities (21000*.14+16800-21820)	2080 U
Maintenance (21000*2+39000-78800)	2200 F
Supplies (21000*.40-9000)	600 U
Indirect labor (21000*1.9+94700-139300)	4700 U
Depreciation	1700 U
Total	6880 U