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	$16,100 plus $0.15 per machine-hour	$	20,450
Maintenance	$39,000 plus $2.00 per machine-hour	$	66,800
Supplies	$0.60 per machine-hour	$	10,000
Indirect labor	$94,100 plus $1.30 per machine-hour	$	117,100
Depreciation	$67,700	$	69,400

During March, the company worked 15,000 machine-hours and produced 9,000 units. The company had originally planned to work 17,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

1
	Planning budget	Flexible budget	Activity variances
Utilities	18650	18350	300	F
Maintenance	73000	69000	4000	F
Supplies	10200	9000	1200	F
Indirect labor	116200	113600	2600	F
Depreciation	67700	67700	0	None
Total	285750	277650	8100	F
2
	Actual cost	Flexible budget	Spending variances
Utilities	20450	18350	2100	U
Maintenance	66800	69000	2200	F
Supplies	10000	9000	1000	U
Indirect labor	117100	113600	3500	U
Depreciation	69400	67700	1700	U
Total	283750	277650	6100	U