Question

Clark Company’s master budget includes $360,000 for equipment depreciation. The master budget was prepared for an annual volume of 120,000 chargeable hours. This volume is expected to occur uniformly throughout the year. During September, Clark performed 9,000 chargeable hours and recorded $28,000 of depreciation. Required: 1. Determine the flexible-budget amount for equipment depreciation in September. 2. Compute the spending variance for the depreciation on equipment. Was the variance favorable (F) or unfavorable (U)? 3. Calculate the fixed overhead production volume variance for depreciation expense in September. Was this variance favorable (F) or unfavorable (U)?

Answer 1

Planned production in September = 120000/12 = 10000 chargeable hours
Standard depreciation per charageable hour = 360000/120000 = $3
1
Flexible-budget amount for equipment depreciation in September	30000	=(360000/120000)*10000
2
Actual depreciation for the month	28000
Flexible-budget amount for equipment depreciation	30000
Spending variance for the depreciation on equipment	2000	Favorable
3
Budgeted depreciation for the month	30000
Total standard depreciation applied	27000	=9000*3
Fixed overhead production volume variance for depreciation expense	3000	Unfavorable