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	$16,000 plus $0.20 per machine-hour	$	22,400
Maintenance	$38,000 plus $1.30 per machine-hour	$	61,700
Supplies	$0.50 per machine-hour	$	11,300
Indirect labor	$94,300 plus $2.00 per machine-hour	$	141,200
Depreciation	$68,100	$	69,800

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
	Planning budget	Flexible budget	Activity variances
Utilities	20600	20200	400	F
Maintenance	67900	65300	2600	F
Supplies	11500	10500	1000	F
Indirect labor	140300	136300	4000	F
Depreciation	68100	68100	0	None
Total expense	308400	300400	8000	F
2
	Actual results	Flexible budget	Spending variances
Utilities	22400	20200	2200	U
Maintenance	61700	65300	3600	F
Supplies	11300	10500	800	U
Indirect labor	141200	136300	4900	U
Depreciation	69800	68100	1700	U
Total expense	306400	300400	6000	U