A factory uses a standard absorption costing system. The fixed production overhead absorption rate is based on labor hours. Extracts from the budgeted and actual results for the previous period are shown below:

Budget Actual

Output (units) 1,500 1,600

Fixed production overhead $300,000 310,000

Labor hours 600 580

Required:

Calculate:

I) The fixed production overhead expenditure variance

II) The fixed Production overhead volume variance

The factory is thinking of introducing an activity based costing system. An analysis of the fixed production overhead for the previous period shows that included in the budget fixed production overheads of $300,000 was $72,000 for material handling .Cost for material handling are incurred when material are shipped from the storage area to the processing plant. Further analysis revealed:

Budget Actual

Material handling cost $72,000 $69,000

Number of material shipments 90 85

Total quantity of materials shipped 360 tons 348 tons

b) Calculate using activity based costing principles:

i) The material handling shipment expenditure variance.

ii) The materials handling shipment efficiency variance.

c) Discuss how the activity based costing could improve the linkage between cost control and responsibility accounting .