Question

A 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 $2,884 per route plus $14 per commuter. The company expected its activity in November to be 89 routes and 256 commuters, but the actual activity was 97 routes and 265 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:A. $35,238 FavorableB. $12,040 FavorableC. $23,198 FavorableD. $35,238 UnfavorableE. $12,040 Unfavorable

Answer 1

B. $12,040 Favorable

Step-by-step explanation:

We will need to calculate first the budgeted cost for bus operating costs in November, which is given by;

C = $56,880 + $2,884* F + $14* N

Where;

F = expected number of routes in the month

N = expected number of commuters in the month

From the passage, the company expected its activity in November to be 89 routes and 256 commuters; we were also informed that the budget for the bus operating costs have been prepared before the actual costs are known.

Therefore, the budgeted cost for bus operating costs in November would be ;

= $56,880 + $2,884 × 89 + $14 × 256

= $56,880 + $256,676 + $3,584

= $317,140

The spending variance for bus operating costs in November would be;

= The actual cost for bus operating costs in November - The Budgeted cost for bus operating costs in November

= $305,100 - $317,140

= $12,040 F