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 plus $0.18 per machine-hour $ 21,760 Maintenance $38,900 plus $1.70 per machine-hour $ 61,600 Supplies $0.70 per machine-hour $ 11,700 Indirect labor $94,400 plus $2.00 per machine-hour $ 129,300 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) Activity variance

	Activity variance
Utilities	2000*.18 = 360 F
Maintenance	2000*1.7 = 3400 F
Supplies	2000*.70 = 1400 F
Indirect labor	2000*2 = 4000 F
Depreciation	0 None
Total	9160 F

2) Spending variance

	Spending variance
Utilities	(15000*.18+16900)-21760 = 2160 U
Maintenance	(15000*1.7+38900)-61600 = 2800 F
Supplies	(15000*.7-11700) = 1200 U
Indirect labor	(15000*2+94400)-129300 = 4900 U
Depreciation	68000-69700 = 1700 U
Total	7160 U