DataP9-2 Activity and Spending Variances. You have just been hired by FAB Corpor
ID: 2460854 • Letter: D
Question
DataP9-2 Activity and Spending Variances. 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 determine the following cost formulas and gathered the following actual costs and data for March. Description Cost Formula Actual Cost Utilities $20,600 plus $0.10 per machine hour $24,200 Maintenance $40,000 plus $1.60 per machine hour $78,100 Supplies $0.30 per machine hour $8,400 Indirect labor $130,000 plus $0.70 per machine hour $149,600 Depreciation $70,000 $71,500 During March, the company worked 26,000 machine-hours and produced 15,000 units. The company had originally planned to work 30,000 machine-hours during March. Required: 1. Prepare a report showing the activity variances for March. Explain what these variances mean. 2. Prepare a report showing the spending variances for March. Explain what these variances mean. DataP9-2 Activity and Spending Variances. 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 determine the following cost formulas and gathered the following actual costs and data for March. Description Cost Formula Actual Cost Utilities $20,600 plus $0.10 per machine hour $24,200 Maintenance $40,000 plus $1.60 per machine hour $78,100 Supplies $0.30 per machine hour $8,400 Indirect labor $130,000 plus $0.70 per machine hour $149,600 Depreciation $70,000 $71,500 During March, the company worked 26,000 machine-hours and produced 15,000 units. The company had originally planned to work 30,000 machine-hours during March. Required: 1. Prepare a report showing the activity variances for March. Explain what these variances mean. 2. Prepare a report showing the spending variances for March. Explain what these variances mean.Explanation / Answer
1. The activity variances are shown below:
FAB Corporation Activity Variances For the Month Ended March 31
The activity variances are all favorable because the actual activity was less than the planned activity and therefore all of the variable costs should be lower than planned in the original budget
2. The spending variances are computed below:
FAB Corporation Activity Variances For the Month Ended March 31
Flexible Budget
Planning Budget
Activity Variances
Machine-hours (q)
26,000
26,000
Utilities ($20,600 + $0.10q)
$ 24,200
$ 23,200
$1,000 U
Maintenance ($40,000 +$1.60q)
78,100
81,600
3,500 F
Supplies ($0.30q)
8,400
7,800
600 U
Indirect labor ($130,000 +$0.70q)
149,600
148,200
1,400 U
Depreciation ($70,000)
71,500
70,000
1,500 U
Total
$331,800
$330,800
$1,000 U
An unfavorable spending variance means that the actual cost was greater than what the cost should have been for the actual level of activity. A favorable spending variance means that the actual cost was less than what the cost should have been for the actual level of activity. While this makes intuitive sense, sometimes a favorable variance may not be good. For example, the rather large favorable variance for maintenance might have resulted from performing less maintenance. Since these variances are all fairly large, they should all probably be investigated.
Flexible Budget Planning Budget Activity Variances Machine-hours (q) 26,000 30,000 Utilities ($20,600 + $0.10q) $ 24,200 $ 23,200 $1,000 F Maintenance ($40,000 +$1.60q) 81,600 88,000 6,400 F Supplies ($0.30q) 7,800 9,000 1,200 F Indirect labor ($130,000 +$0.70q) 148,200 151,000 2,800 F Depreciation ($70,000) 70,000 70,000 0 Total $330,800 $341,600 $10,800 FRelated Questions
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