Required:
Calculate the company’s activity variances for August. Note: Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance). Input all amounts as positive values.
The Correct Answer and Explanation is:
To calculate the company’s activity variances for August, we need to understand that activity variances reflect the difference between the actual activity level and the expected activity level (based on budgeted figures). These variances can be either favorable (F) or unfavorable (U) depending on whether the actual activity is higher or lower than expected, and how it impacts revenues or costs.
Formula for Activity Variance:
- Revenue Activity Variance:
This measures the difference in revenue due to changes in the actual activity level. It is calculated as:
[
\text{Revenue Activity Variance} = (\text{Actual Activity Level} – \text{Budgeted Activity Level}) \times \text{Budgeted Revenue per Unit}
]
If the actual activity is higher than the budgeted activity, the variance will be favorable (F) because more units have been sold, leading to more revenue. - Variable Cost Activity Variance:
This measures the difference in variable costs due to changes in the actual activity level. It is calculated as:
[
\text{Variable Cost Activity Variance} = (\text{Actual Activity Level} – \text{Budgeted Activity Level}) \times \text{Budgeted Variable Cost per Unit}
]
If the actual activity level is higher than budgeted, and the variable cost is also higher, the variance will be unfavorable (U) because more costs are incurred due to higher production or sales. - Fixed Cost Activity Variance:
Fixed costs remain constant regardless of activity levels, so there will generally be no variance for fixed costs unless there are errors in the application or adjustments for something like changes in capacity or production goals.
Example Calculation:
Let’s assume the following for the company’s activity in August:
- Budgeted Activity Level: 10,000 units
- Actual Activity Level: 12,000 units
- Budgeted Revenue per Unit: $50
- Budgeted Variable Cost per Unit: $30
- Budgeted Fixed Costs: $100,000
- Actual Fixed Costs: $100,000 (no change)
1. Revenue Activity Variance:
[
(12,000 – 10,000) \times 50 = 2,000 \times 50 = 100,000 \, \text{Favorable (F)}
]
2. Variable Cost Activity Variance:
[
(12,000 – 10,000) \times 30 = 2,000 \times 30 = 60,000 \, \text{Unfavorable (U)}
]
3. Fixed Cost Activity Variance:
No change in fixed costs, so the variance is None.
Summary of Variances:
- Revenue Activity Variance: $100,000 (F)
- Variable Cost Activity Variance: $60,000 (U)
- Fixed Cost Activity Variance: None
The net effect of these variances would be an overall unfavorable result because while revenue increased, the increase in variable costs was more substantial, leading to an overall higher cost structure than anticipated.