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 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 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 $16,500 plus $0.19 per machine-hour $ 22,480 Maintenance $38,800 plus $1.80 per machine-hour $ 72,200 Supplies $0.50 per machine-hour $ 10,800 Indirect labor $94,200 plus $1.40 per machine-hour $ 125,900 Depreciation $67,600 $ 69,300

Explanation / Answer

1 Planning budget Flexible budget Activity variances Utilities 20680 20300 380 U Maintenance 78400 74800 3600 U Supplies 11000 10000 1000 U Indirect labor 125000 122200 2800 U Depreciation 67600 67600 0 None Total expenses 302680 294900 7780 U 2 Actual Flexible budget Spending variances Utilities 22480 20300 2180 U Maintenance 72200 74800 2600 F Supplies 10800 10000 800 U Indirect labor 125900 122200 3700 U Depreciation 69300 67600 1700 U Total expenses 300680 294900 5780 U

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