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	$16,400 + $0.19 per machine-hour	$	22,760
Maintenance	$38,400 + $1.80 per machine-hour	$	75,400
Supplies	$0.80 per machine-hour	$	19,000
Indirect labor	$94,600 + $2.00 per machine-hour	$	143,500
Depreciation	$67,600	$	69,300

During March, the company worked 22,000 machine-hours and produced 16,000 units. The company had originally planned to work 24,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Report showing Activity Variance

Particulars	Planning Budget	Flexible Budget	Activity Variance
Machine Hours (q)	24000	22000
Utilities 16400+(0.19*q)	20,960	20,580	380	Favourable
Maintenance 38400+(1.80*q)	81600	78000	3600	Favourable
Supplies (0.80*q)	19200	17600	1600	Favourable
Indirect Labour 94600+(2.0*q)	142,600	138600	4000	Favourable
Depreciation	67600	67600	0	Favourable
Total	331,960	322,380	9580	Favourable

Report showing Spending Variance

Particulars	Flexible Budget	Actual Results	Spending Variance
Machine Hours (q)	22000	22000
Utilities 16400+(0.19*q)	20580	22760	-2180	Unfavourable
Maintenance 38400+(2.0*q)	78000	75400	2600	Favourable
Supplies (0.80*q)	17600	19000	-1400	Unfavourable
Indirect Labour 94600+(2.0*q)	138600	143500	-4900	Unfavourable
Depreciation	67600	69300	-1700	Unfavourable
Total	322380	329,960	-7580	Unfavourable