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.

Variance analysis studies the relationship between actual and budgeted cost for business activities. Variance analysis helps the management in two ways;

Favorable
Unfavorable

Favorable - if the actual cost incurred is less than the budgeted cost, the difference amount is a saving for the company.

Unfavorable - if the actual cost is more than the budgeted cost, the difference is an extra expenditure for the company.

Flexible budget;

The flexible budget is prepared at different levels of volume that was initially projected by the master budget.
It is highly styled and more useful than the master budget.

The report showing the Activity and Spending Variances for march is given in the file attached below, in other not to cause confusion. Thank you.