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	$16,500 plus $0.19 per machine-hour	$	22,480
Maintenance	$38,800 plus $1.80 per machine-hour	$	72,200
Supplies	$0.50 per machine-hour	$	10,800
Indirect labor	$94,200 plus $1.40 per machine-hour	$	125,900
Depreciation	$67,600	$	69,300

During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

1
	Planning budget	Flexible budget	Activity variances
Utilities	20680	20300	380	U
Maintenance	78400	74800	3600	U
Supplies	11000	10000	1000	U
Indirect labor	125000	122200	2800	U
Depreciation	67600	67600	0	None
Total expenses	302680	294900	7780	U
2
	Actual	Flexible budget	Spending variances
Utilities	22480	20300	2180	U
Maintenance	72200	74800	2600	F
Supplies	10800	10000	800	U
Indirect labor	125900	122200	3700	U
Depreciation	69300	67600	1700	U
Total expenses	300680	294900	5780	U