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 + $0.11 per machine-hour	$	20,070
Maintenance	$38,600 + $1.90 per machine-hour	$	64,700
Supplies	$0.90 per machine-hour	$	15,100
Indirect labor	$94,500 + $1.10 per machine-hour	$	114,100
Depreciation	$68,000	$	69,700

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.

	Flexible budget	Activity variances		Planning budget
Machine hours	15,000			17,000
Utilities	$18,050 (15,000*$0.11+$16,400)	$220	F	$18,270 (17,000*$0.11+$16,400)
Maintenance	67,100 (15,000*$1.90+$38,600)	3,800	F	70,900 (17,000*$1.90+$38,600)
Supplies	13,500 (15,000*$0.90)	1,800	F	15,300 (17,000*$0.90)
Indirect labor	111,000 (15,000*$1.10+$94,500)	2,200	F	113,200 (17,000*$1.10+$94,500)
Depreciation	68,000	0	None	68,000

2.

	Actual results	Spending variance		Flexible budget
Machine hours	15,000			15,000
Utilities	$20,070	$2,020	U	$18,050 (15,000*$0.11+$16,400)
Maintenance	64,700	2,400	F	67,100 (15,000*$1.90+$38,600)
Supplies	15,100	1,600	U	13,500 (15,000*$0.90)
Indirect labor	114,100	3,100	U	111,000 (15,000*$1.10+$94,500)
Depreciation	69,700	1,700	U	68,000