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	$17,000 + $0.18 per machine-hour	$	23,300
Maintenance	$38,200 + $1.80 per machine-hour	$	77,000
Supplies	$0.40 per machine-hour	$	9,800
Indirect labor	$94,600 + $2.00 per machine-hour	$	145,500
Depreciation	$68,100	$	69,800

During March, the company worked 23,000 machine-hours and produced 17,000 units. The company had originally planned to work 25,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Answer 1

Answer:

Report showing Activity Variance

Particulars	Planning Budget	Flexible Budget	Activity Variance
Machine Hours (q)	25000	23000
Utilities 17000+(0.18*q)	21500	21140	360	Favourable
Maintenance 38200+(1.80*q)	83200	79600	3600	Favourable
Supplies (0.40*q)	10000	9200	800	Favourable
Indirect Labour 94600+(2*q)	144600	140600	4000	Favourable
Depreciation	68100	68100	0	Favourable
Total	352400	341640	8760	Favourable

Report showing Spending Variance

Particulars	Flexible Budget	Actual Results	Spending Variance
Machine Hours (q)	23000	23000
Utilities 17000+(0.18*q)	21140	23300	-2160	Unfavourable
Maintenance 38200+(1.80*q)	79600	77000	2600	Favourable
Supplies (0.40*q)	9200	9800	-600	Unfavourable
Indirect Labour 94600+(2*q)	140600	145500	-4900	Unfavourable
Depreciation	68100	69800	-1700	Unfavourable
Total	341640	348400	-6760	Unfavourable