Prestridge Corporation is a service company that measures its output by the number of customers served. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results of operations for August. When the company prepared its planning budget at the beginning of August, it assumed that 31 customers would have been served. However, 29 customers were actually served during August.The activity variance for total expenses for August would have been closest to:
A) $3,000 U
B) $2,500 F
C) $3,000 F
D) $2,500 U

Question

Prestridge Corporation is a service company that measures its output by the number of customers served. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results of operations for August.  When the company prepared its planning budget at the beginning of August, it assumed that 31 customers would have been served. However, 29 customers were actually served during August.The activity variance for total expenses for August would have been closest to:
A) $3,000 U 
B) $2,500 F 
C) $3,000 F 
D) $2,500 U

Quizplus · Accepted Answer

To calculate the activity variance, we need to compare the actual expenses incurred with the expected expenses based on the planned level of activity (31 customers served).

Variable costs per customer: 
$120 + $50 = $170

Fixed costs: 
Rent + Utilities + Salaries = $5,000

Planned expenses (31 customers): 
Variable costs = 31 × $170 = $5,270 
Fixed costs = $5,000 
Total planned expenses = $10,270

Actual expenses (29 customers): 
Variable costs = 29 × $170 = $4,930 
Fixed costs = $5,000 
Total actual expenses = $9,930

Activity variance: 
Total actual expenses - Total planned expenses 
= $9,930 - $10,270 
= $(-340)

Since the actual expenses are less than the planned expenses, the activity variance is unfavorable (unfavorable means negative in this case). Therefore, the closest answer choice to this would be C) $3,000 F (favorable), which is closest to the actual activity variance of $(-340).

Prestridge Corporation Is a Service Company That Measures Its Output