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	$16,600 plus $0.12 per machine-hour	$	20,440
Maintenance	$38,000 plus $1.70 per machine-hour	$	60,700
Supplies	$0.70 per machine-hour	$	11,700
Indirect labor	$94,100 plus $1.30 per machine-hour	$	117,100
Depreciation	$68,100	$	69,800

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
	Activity variances		Planning budget	Flexible budget
Machine-hours			17000	15000
Utilities	240	F	18640	18400
Maintenance	3400	F	66900	63500
Supplies	1400	F	11900	10500
Indirect labor	2600	F	116200	113600
Depreciation	0	None	68100	68100
Total expense	7640	F	281740	274100
2
	Spending variances		Actual results	Flexible budget
Machine-hours			15000	15000
Utilities	2040	U	20440	18400
Maintenance	2800	F	60700	63500
Supplies	1200	U	11700	10500
Indirect labor	3500	U	117100	113600
Depreciation	1700	U	69800	68100
Total expense	5640	U	279740	274100