Question

Clark Company’s master budget includes $360,000 for equipment depreciation. The master budget was prepared for an annual volume of 120,000 chargeable hours. This volume is expected to occur uniformly throughout the year. During September, Clark performed 9,000 chargeable hours and recorded $28,000 of depreciation. Required:1. Determine the flexible-budget amount for equipment depreciation in September.2. Compute the spending variance for the depreciation on equipment. Was the variance favorable (F) or unfavorable (U)?3. Calculate the fixed overhead production volume variance for depreciation expense in September. Was this variance favorable (F) or unfavorable (U)?

Answer 1

Answer:

(1) $30,000

(2) $2,000 Favorable

(3) $3,000 Unfavorable

Explanation:

Planned production in September:

= Annual volume ÷ 12 months

= 120,000 ÷ 12

= 10,000 chargeable hours

Standard depreciation per charageable hour:

= master budget for equipment depreciation ÷ Annual volume

= 360,000 ÷ 120,000

= $3

(1) Flexible-budget amount for equipment depreciation in September:

= (master budget for equipment depreciation ÷ Annual volume) × Planned production in September

= (360,000 ÷ 120,000) × 10,000

= $30,000

(2) Spending variance for the depreciation on equipment:

= Actual depreciation for the month - Flexible-budget amount for equipment depreciation

= $28,000 - $30,000

= $2,000 Favorable

(3) Fixed overhead production volume variance for depreciation expense:

= Budgeted depreciation for the month - Total standard depreciation applied

= $30,000 - (9,000 × 3)

= $30,000 - $27,000

= $3,000 Unfavorable