Question

Lochner Corporation is an oil well service company that measures its output by the number of wells serviced. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results of operations for June.

	Fixed Element per Month			Variable Element per Well Serviced		Actual Total for June
Revenue				$	5,600	$	148,000
Employee salaries and wages	$	40,600		$	1,200	$	73,700
Servicing materials				$	500	$	13,600
Other expenses	$	42,800				$	43,300

When the company prepared its planning budget at the beginning of June, it assumed that 24 wells would have been serviced. However, 26 wells were actually serviced during June.

The spending variance for “Employee salaries and wages” for June would have been closest to:

Answer 1

Solution:

Budgeted fixed cost of employee salary and wages = $40,600

Budgeted variable cost per unit of employee salary and wages = $1,200 per well serviced

Budgeted variable cost of employee salary and wages for actual well serviced = 26 * $1,200 = $31,200

Total budgeted cost of employee salary and wages for actual well serviced = $40,600 + $31,200 = $71,800

Actual cost incurred for  employee salary and wages = $73,700

Spending variance = Budgeted cost - Actual cost = $71,800 - $73,700 = $1,900 U