Question

The Latiker commuter bus company uses two measures of activity, routes and commuters, in the cost formulas in its budgets and performance reports. The cost formula for bus operating costs is $56,880 per month plus $2,888 per route plus $17 per commuter. The company expected its activity in November to be 87 routes and 259 commuters, but the actual activity was 94 routes and 267 commuters. The actual cost for bus operating costs in November was $305,100. The spending variance for bus operating costs in November would be closest to: Multiple Choice $20,352 Favorable $27,791 Favorable $7,439 Favorable $27,791 Unfavorable $7,439 Unfavorable

Answer 1

Spending variance

A spending variance is the difference between the budgeted cost and actual cost paid for an item. In other words, it’s the difference between what management thought it was going to pay for a good and the amount it actually paid for it.

When the budgeted expenses are less than the actual expenses, the difference is considered an unfavorable variance because this results in fewer profits for the period.

when the budgeted expenses are more than the actual expenses, the difference is considered a favorable variance because actual expenses were decreased relative to expected ones resulting in greater net income. This is usually called coming in under budget.

Formula

1. Variable overhead spending variance = (Actual hours worked × Actual variable overhead rate) – (Actual hours worked × Standard variable overhead rate)

2. *Actual hours worked × Actual variable overhead rate = Actual variable overhead for the period.

3. Variable overhead spending variance = (AH × AR) – AH × SR)

Computation of cost for Latiker bus company
Sl.No.	Particulars	Actual Cost
a	Bus operating cost per month	$        56,880
b	Number of routes	$              94
c	Cost per route	$          2,888
d	Total route cost (b*c)	$     2,71,472
e	Number of commuters	$            267
f	Cost per commuter	$              17
g	Total commuter cost (e*f)	$          4,539
h	Total standard cost (a+d+g)-AH*SR	$   3,32,891
i	Total actual cost (given) AH*AR	$   3,05,100
j	Spending variance (i-j)	$      27,791

Spending variance is favourable $27,791, option II is correct answer, others are incorrect.