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 23,000 machine-hours and produced 17,000 units. The company had originally planned to work 25,000 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 $16,000 plus $0.14 per machine-hour $ 21,300 Maintenance $38,600 plus $1.50 per machine-hour $ 69,900 Supplies $0.60 per machine-hour $ 14,800 Indirect labor $94,300 plus $2.00 per machine-hour $ 145,200 Depreciation $68,400 $ 70,100

Explanation / Answer

Activity Variance Particulars Planning Budget Flexible Budget Activity Variance Machine Hours 25000 23000 Utilities 19500 19220 280 F [16000+(0.14*25000)] [16000+(0.14*23000)] (19500 - 19220) Maintenance 76100 73100 3000 F [38600+(1.5*25000)] [38600+(1.5*23000)] (76100 -73100) Supplies 15000 13800 1200 F (0.60*25000) (0.60*23000) (15000 -13800) Indirect Labor 144300 140300 4000 F 94300+(2*25000) 94300+(2*23000) (144300 - 140300) Depreciation 68400 68400 0 No Effect Total 323300 314820 8480 F Spending Variance Particulars Flexible Budget Actual Results Spending Variance Machine Hours 23000 23000 Utilities 19220 21300 2080 U [16000+(0.14*23000)] (21300 - 19220) Maintenance 73100 69900 (3200) F [38600+(1.5*23000)] (73100 - 69900) Supplies 13800 14800 1000 U (0.60*23000) (14800 - 13800) Indirect Labor 140300 145200 4900 U 94300+(2*23000) (145200 - 140300) Depreciation 68400 70100 1700 U (70100-68400) Total 314820 321300 6480 U

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