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 22,000 machine-hours and produced 16,000 units. The company had originally planned to work 24,000 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 $16,900 plus $0.21 per machine-hour $ 23,740 Maintenance $38,300 plus $1.90 per machine-hour $ 77,700 Supplies $0.40 per machine-hour $ 9,400 Indirect labor $94,500 plus $1.60 per machine-hour $ 133,800 Depreciation $67,700 $ 69,400

Explanation / Answer

1 Flexible budget Planning budget Activity variances Utilities 21520 21940 420 F Maintenance 80100 83900 3800 F Supplies 8800 9600 800 F Indirect labor 129700 132900 3200 F Depreciation 67700 67700 0 None Total expenses 307820 316040 8220 F 2 Flexible budget Actual Activity variances Utilities 21520 23740 2220 U Maintenance 80100 77700 2400 F Supplies 8800 9400 600 U Indirect labor 129700 133800 4100 U Depreciation 67700 69400 1700 U Total expenses 307820 314040 6220 U

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