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	$16,500 plus $0.13 per machine-hour	$	21,030
Maintenance	$38,900 plus $1.30 per machine-hour	$	60,000
Supplies	$0.60 per machine-hour	$	12,400
Indirect labor	$94,800 plus $1.40 per machine-hour	$	125,100
Depreciation	$68,200	$	69,900

During March, the company worked 19,000 machine-hours and produced 13,000 units. The company had originally planned to work 21,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Answer-1)-

FAB Corporation
Activity Variance for the month of March 31
Particulars	Planning Budget	Flexible Budget	Difference	Remark
	$	$	$
Utilities	16500+(21000 machine hours*0.13 per hour)=19230	16500+(19000 machine hours*0.13 per hour)=18970	260	Favorable
Maintenance	38900+(21000 machine hours*1.30 per hour)=66200	38900+(19000 machine hours*1.30 per hour)=63600	2600	Favorable
Supplies	21000 machine hours*0.60 per hour=12600	19000 machine hours*0.60 per hour=11400	1200	Favorable
Indirect Labor	94800+(21000 machine hours*1.40 per hour)=124200	94800+(19000 machine hours*1.40 per hour)=121400	2800	Favorable
Depreciation	68200	68200	0	None
Total	290430	283570	6860	Favorable

2)-

FAB Corporation
Spending variance for the month of March 31
Particulars	Flexible Budget	Actual	Difference	Remark
	$	$	$
Utilities	16500+(19000 machine hours*0.13 per hour)=18970	21030	-2060	Unfavorable
Maintenance	38900+(19000 machine hours*1.30 per hour)=63600	60000	3600	Favorable
Supplies	19000 machine hours*0.60 per hour=11400	12400	-1000	Unfavorable
Indirect Labor	94800+(19000 machine hours*1.40 per hour)=121400	125100	-3700	Unfavorable
Depreciation	68200	69900	-1700	Unfavorable
Total	283570	288430	-4860	Unfavorable