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: Cost Formula Actual Cost in March Utilities $16,800 plus $0.20 per machine-hour $ 22,600 Maintenance $38,700 plus $1.70 per machine-hour $ 66,500 Supplies $0.60 per machine-hour $ 11,800 Indirect labor $94,900 plus $1.80 per machine-hour $ 131,800 Depreciation $67,700 $ 69,400 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.

Explanation / Answer

Planned Budget Flexible Budget Machine Hours 20000 18000 Variable cost V Fixed cost F Total cost (V*MH)+F Utilities 0.2 per machine hours 16800 20800 20400 Maintainence 1.7 per machine hours 38700 72700 69300 Supplies 0.6 per machine hours 12000 10800 Indirect Labor 1.8 per machine hours 94900 130900 127300 Depreciatio 67700 67700 67700 ans 1 Activitu varaince Planned Flexible Variance Utilities 20800 20400 400 F Maintainence 72700 69300 3400 F Supplies 12000 10800 1200 F Indirect Labor 130900 127300 3600 F Depreciatio 67700 67700 0 None Total 304100 295500 8600 F 2) Spending variance Actual Flexible Variance Utilities 22600 20400 2200 U Maintainence 66500 69300 2800 F Supplies 11800 10800 1000 U Indirect Labor 131800 127300 4500 U Depreciatio 69400 67700 1700 U Total 302100 295500 6600 U

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