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: Maintenance Supplies Indirect labor Depreciation Cost Formula $17,000 plus $0.17 per machine-hour $38, 300 plus $2.10 per machine-hour $0.40 per machine-hour $94,100 plus $1.90 per machine-hour $67,900 Cost in March $ 22,540 S 78,300 S 8.600 $136.800 $69.600 During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March Required: 1. Calculate the activity variances for March. 2. Calculate the spending variances for March. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Calculate the activity variances for March. (Indicate the effect of each vanance by selecting for favorable, un for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.

Answer 1

Ans. 1	FAB CORPORATION
	Activity Variances
	For the Month Ended March 31
		Flexible Budget	Activity variance		Planning Budget
	Machine hours	20000			22000
	Utilities	20400	$340	F	20740
	Maintenance	80300	$4,200	F	84500
	Supplies	8000	$800	F	8800
	Indirect labor	132100	$3,800	F	135900
	Depreciation	$67,900	$0	None	$67,900
	Total expenses	$308,700	$9,140	F	$317,840
	Activity variance =   Flexible budget - Planning budget
	*Increase in expenses from planninng budget to flexible budget =   Unfavorable.
	*Decrease in expenses from planninng budget to flexible budget =   Favorable.
Ans. 2	FAB CORPORATION
	Spending Variances
	For the Month Ended March 31
		Actual results	Activity variance		Flexible Budget
	Machine hours	20000			20000
	Utilities	$22,540	$2,140	U	20400
	Maintenance	$78,300	$2,000	F	80300
	Supplies	$8,600	$600	U	8000
	Indirect labor	$136,800	$4,700	U	132100
	Depreciation	$69,600	$1,700	U	$67,900
	Total expenses	$315,840	$7,140	U	$308,700
	Spending variance   =   Actual results - Flexible budget
	*Increase in expenses from flexible budget to actual results =   Unfavorable.
	*Decrease in expenses from flexible budget to actual results =   Favorable.
	* Calculations for Flexible budget & Planning budget:
		Flexible Budget	Planning Budget
	Machine hours	20000	22000
	Utilities	$17,000 + ($0.17 * 20000)	$17,000 + ($0.17 * 22000)
	Maintenance	$38,300 + ($2.10 * 20000)	$38,300 + ($2.10 * 22000)
	Supplies	$0.40 * 20,000	$0.40 * 22,000
	Indirect labor	$94,100 + ($1.90 * 20000)	$94,100 + ($1.90 * 22000)
	Depreciation	$67,900	$67,900
	*Flexible budget is prepared on the basis of actual units (machine hours).
	*Fixed expenses remain same as planning budget.