You have just been hired by FAB Corporation, the manufacturer of a revolutionary

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:

During March, the company worked 17,000 machine-hours and produced 11,000 units. The company had originally planned to work 19,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Cost Formula Actual Cost in March Utilities $16,200 plus $0.19 per machine-hour $ 21,610 Maintenance $38,400 plus $1.40 per machine-hour $ 58,800 Supplies $0.50 per machine-hour $ 9,300 Indirect labor $94,300 plus $1.90 per machine-hour $ 131,300 Depreciation $67,900 $ 69,600

Explanation / Answer

1.

Calculation of Activity Variances for March = FAB Corporation Activity Variance For the month ended March 31 Planning Budget Flexible Budget Activity Variance Machine hours (q)         19,000           17,000 Utilities [$16,200 + ($0.19 X q)] $     19,810 $       19,430 $          380 F Maintenance [$38,400 + ($1.40 X q)] $     65,000 $       62,200 $      2,800 F Supplies ($0.50 X q) $       9,500 $         8,500 $      1,000 F Indirect Labour [$94,300 + ($1.90 X q)] $ 1,30,400 $   1,26,600 $      3,800 F Depreciation $     67,900 $       67,900 $             -   N Total $ 2,92,610 $   2,84,630 $      7,980 F U= Unfavourable F= Favourable N= No effect 2. Calculation of Spending Variances for March = FAB Corporation Activity Variance For the month ended March 31 Flexible Budget Actual results Spending Variances Machine hours (q)         17,000           17,000 Utilities [$16,200 + ($0.19 X q)] $     19,430 $       21,610 $      2,180 U Maintenance [$38,400 + ($1.40 X q)] $     62,200 $       58,800 $      3,400 F Supplies ($0.50 X q) $       8,500 $         9,300 $          800 U Indirect Labour [$94,300 + ($1.90 X q)] $ 1,26,600 $   1,31,300 $      4,700 U Depreciation $     67,900 $       69,600 $      1,700 U Total $ 2,84,630 $   2,90,610 $      5,980 U U= Unfavourable F= Favourable N= No effect

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