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

Question

Quizplus · Accepted Answer

Using the cost formula given, we can calculate the expected vehicle operating cost for February as:

$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.

Taussig Snow Removal's Cost Formula for Its Vehicle Operating Cost