Question

Lochner Corporation is an oil well service company that measures its output by the number of wells serviced. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results of operations for June.

Fixed element per month Variable element per well serviced Actual total for June
Revenue $5,600 $148,000
Employee salaries
and wages $40,600 $1,200 $73,700
Servicing materials $500 $13,600
Other expenses $42,800 $43,300.
When the company prepared its planning budget at the beginning of June, it assumed that 24 wells would have been serviced. However, 26 wells were actually serviced during June. The spending variance for "employee salaries and wages" for June would have been closest to:
A. $1,200 favorable
B. $1,200 unfavorable
C. $2,400 favorable
D. $2,400 unfavorable

Answer 1

The calculated spending variance for "employee salaries and wages" would be $1,900 unfavourable, but this figure does not match the provided answer choices, indicating a possible typo or error in the question's figures.

Step-by-step explanation:

The student is asking about calculating the spending variance for "employee salaries and wages" for Lochner Corporation. To answer this, we need to compare the budgeted costs to the actual costs for the variable component. Lochner Corporation budgeted for 24 wells but serviced 26 wells. The budgeted variable cost for employee salaries and wages per well serviced is $1,200. Therefore, the budgeted cost for 24 wells would be 24 wells * $1,200/well = $28,800. Since 26 wells were serviced, the actual number of wells would generate an expected cost of 26 wells * $1,200/well = $31,200. The actual cost was $73,700, which includes both fixed and variable costs. The fixed cost component is $40,600, so the variable portion of the actual cost is $73,700 - $40,600 = $33,100. Comparing the variable component of the expected cost at the actual output to the actual variable cost gives us the variance: $33,100 (actual) - $31,200 (expected) = $1,900 unfavourable. However, the question does not present $1,900 as an option, suggesting a typo in the actual cost or a misunderstanding of the presented figures.