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 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.

Cost Formula Actual Cost in March Utilities $16,900 plus $0.17 per machine-hour $ 22,100 Maintenance $38,400 plus $1.10 per machine-hour $ 54,200 Supplies $0.60 per machine-hour $ 11,800 Indirect labor $94,800 plus $1.50 per machine-hour $ 125,700 Depreciation $67,800 $ 69,500

Explanation / Answer

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Static budget Flexible budget Activity variance Utilities 20300 19960 340 F Maintenance 60400 58200 2200 F Supplies 12000 10800 1200 F Indirect labour 124800 121800 3000 F Depreciation 67800 67800 None Total 285300 278560 6740 F

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