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	$16,900 + $0.13 per machine-hour	$	21,820
Maintenance	$38,500 + $1.60 per machine-hour	$	70,700
Supplies	$0.30 per machine-hour	$	7,000
Indirect labor	$94,200 + $1.50 per machine-hour	$	131,100
Depreciation	$68,100	$	69,800

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

1
	Planning budget	Flexible budget	Activity variances
Utilities	20020	19760	260	F
Maintenance	76900	73700	3200	F
Supplies	7200	6600	600	F
Indirect labor	130200	127200	3000	F
Depreciation	68100	68100	0	None
Total	302420	295360	7060	F
2
	Actual cost	Flexible budget	Spending variances
Utilities	21820	19760	2060	U
Maintenance	70700	73700	3000	F
Supplies	7000	6600	400	U
Indirect labor	131100	127200	3900	U
Depreciation	69800	68100	1700	U
Total	300420	295360	5060	U