Question

Hirons Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets and performance reports. The cost formula for plane operating costs is $58,190 per month plus $3,072 per flight plus $14 per passenger. The company expected its activity in November to be 88 flights and 262 passengers, but the actual activity was 91 flights and 264 passengers. The actual cost for plane operating costs in November was $331,340. The spending variance for plane operating costs in November would be closest to:

Answer 1

Answer:

The spending variance for plane operating costs is closest to $282,394

Explanation:

The spending variance is the difference between the budgeted amount for an expense to be made and the actual amount that was spent on the expense. It is said to be favorable when the budgeted amount is less that the amount finally spent, and unfavorable when the budgeted amount is less than  the actual amount. To solve this, we will categorize the entries into budgeted amount and actual amount, find their respective sums, and find the difference between them, this will form the spending variance. It is shown below:

cost per flight = $3,072

cost per passenger = $14

Budgeted amount

Plane operating cost                        = $   58,190

cost of 88 flights = 88 × 3072         = $ 270,336

cost of 262 passengers = 262 × 14 = $      3,668

Total budgeted cost =                         $ 332,194

Actual Amount

Plane operating cost                         = $ 331,340

cost of 91 planes = 91 × 3072            = $ 279,552

cost of 264 passengers = 264 × 14   = $     3,696

Total Actual Cost                                = $ 614,588

Cost Variance = Total actual cost - Total budgeted cost

= 614,588 - 332,194 =$282,394. The cost variance is unfavorable because the actual cost was more than the budgeted cost