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 plus $0.16 per machine-hour	$	21,400
Maintenance	$38,100 plus $1.40 per machine-hour	$	59,900
Supplies	$0.50 per machine-hour	$	9,800
Indirect labor	$94,900 plus $1.40 per machine-hour	$	123,800
Depreciation	$68,500	$	70,200

During March, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally planned to work 20,000 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*.16 = 320 F
Maintenance	2000*1.4 = 2800 F
Supplies	2000*.50 = 1000 F
Indirect labor	2000*1.4 = 2800 F
Depreciation	68500-68500 = 0 None
Total	6920 F

2) Spending variance

	Spending variance
Utilities	(18000*.16+16400-21400) = 2120 U
Maintenance	(18000*1.4+38100-59900) = 3400 F
Supplies	(18000*.50-9800) = 800 U
Indirect labor	(18000*1.4+94900-123800) = 3700 U
Depreciation	68500-70200 = 1700 U
Total	4920 U