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	$16,900 + $0.18 per machine-hour	$	21,580
Maintenance	$38,300 + $2.00 per machine-hour	$	64,100
Supplies	$0.60 per machine-hour	$	9,400
Indirect labor	$95,000 + $1.20 per machine-hour	$	115,100
Depreciation	$68,400	$	70,100

During March, the company worked 14,000 machine-hours and produced 8,000 units. The company had originally planned to work 16,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

1)calculation of Activity variance:

Utilities[16900+(0.18*16000)]-[16900+(0.18*14000)]	360F
Maintenance[64100+(2*16000)]-[64100+(2*14000)]	4000F
Supplies[16000*0.60]-[14000*0.60]	1200F
Indirect Labour[95000+(1.2*16000)]-[95000+(14000*1.2)]	2400F
Depreciation	0 None
Total	7960F

2)Calculation of Spending variance :

Utilities(21580-[16900+(0.18*14000)])	2160U
Maintenance(64100-[38300+(2*14000)])	2200F
Supplies(9400-(14000*0.60))	1000U
Indirect labour(115100-(95000+(1.2*14000)))	3300U
Depreciation(70100-68400)	1700U
Total	5960U