Asked by Nadia Kovacs on Jun 17, 2024
Verified
Taussig Snow Removal's cost formula for its vehicle operating cost is $1,880 per month plus $394 per snow-day. For the month of February, the company planned for activity of 13 snow-days, but the actual level of activity was 14 snow-days. The actual vehicle operating cost for the month was $7,250. The activity variance for vehicle operating cost in February would be closest to:
A) $394 F
B) $248 U
C) $394 U
D) $248 F
Vehicle Operating Cost
The recurring expenses associated with using a vehicle, including fuel, maintenance, insurance, and depreciation.
Snow-Day
Typically refers to a day on which work or school is canceled due to excessive snowfall or hazardous weather conditions.
Activity Variance
The discrepancy between budgeted activity levels and actual activity levels, impacting the allocation of overhead costs.
- Implement the principles of budgeting and variance analysis across various cost categories (variable, fixed) and operational activities (jobs, meals, flights, and more).
- Appraise the efficiency with which resources are utilized across various operational settings.
Verified Answer
$1,880 + $394 × 13 = $6,082
The actual cost for the month was $7,250, so there is an unfavorable cost variance of:
$7,250 - $6,082 = $1,168 U
To break down this variance into its activity and rate components, we can use the following formula:
Actual Cost - Expected Cost = Activity Variance + Rate Variance
Plugging in the numbers we have:
$7,250 - $6,082 = Activity Variance + Rate Variance
$1,168 = Activity Variance + Rate Variance
We know that the company planned for 13 snow-days but actually had 14 snow-days, so the activity variance is:
Activity Variance = $394 × (Actual Activity - Planned Activity)
Activity Variance = $394 × (14 - 13)
Activity Variance = $394 F
Substituting this into the equation above:
$1,168 = $394 F + Rate Variance
Rate Variance = $1,168 - $394 F
Rate Variance = $774 U
Therefore, the total variance is composed of a $394 F activity variance and a $774 U rate variance. The closest option is (C) $394 U for the activity variance.
Learning Objectives
- Implement the principles of budgeting and variance analysis across various cost categories (variable, fixed) and operational activities (jobs, meals, flights, and more).
- Appraise the efficiency with which resources are utilized across various operational settings.
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