Question

Heather's Horse Spa (HHS) is an establishment that boards, trains, and pampers horses while their owners are on vacation. Heather sells her service as an "enchanting vacation experience for your horse while you vacation elsewhere." Horse feed, shampoos, ribbons, and other supplies are treated as variable indirect costs. Consequently, there are no direct materials involved in the vacation service. Other overhead costs including indirect labor, depreciation on the barn, and advertising are fixed. Both variable and fixed overhead are allocated to each horse guest-week using the weight of the horse as the basis of allocation.

HHS budgeted amounts for August 2015 were:

Horse guest-weeks : 40

Average weight per horse: 500kg

variable overhead cost per kilogram of horse: $0.4/kg

fixed overhead rate: $2.75/kg

Actual results for Augest 2015 were:

Horse guest-weeks: 38

Average weight per horse: 525kg

Actual variable overhead: $7500

Actual fixed overhead: $50000

Require:

1. Calculate the variable overhead spending and efficiency variances and indicate whether each is favorable (F) or unfavorable (U).

2. Calculate the fixed overhead spending and production-volume variances and indicate whether each favorable (F) or unfavorable (U).

3. Explain what the variable overhead rate variance means. What factors could have caused it?

4. What factors could have caused the variable overhead efficiency variance?

5. If fixed overhead is, in fact, fixed, how could a fixed overhead rate variance occur?

6. What caused the fixed overhead production-volume variance? What does it mean? What are the negative implications, if any, of the production-volume variance?

Answer 1

1. a. Variable overhead spending variance

Spending variance = Actual horse week x Actual average Weight x (Actual Variable rate - Standard Variable Rate)

Actual Variable Rate = Actual Overheads / (Actual horse week x Actual average Weight)

= 7,500 / (38 x 525) = $0.376 per kg

Standard Rate = $0.4 per kg

Variable Spending variance = 38 x 525 kg x (0.376 - 0.4) = $480 (F)

b. Variable overhead efficiency variance

Efficiency variance = Standard Rate x (Actual weight x actual hours - Standard Weight x actual hours)

= 0.4 x (525 x 38 - 500 x 38) = $380 (U)

2. a. Fixed overhead spending variance = Actual fixed overheads - Budgeted Fixed overheads

= 50,000 - (2.75 x 500 x 40) = $5,000 (F)

b. Fixed overhead production volume variance

Production volume variance = Absorbed Fixed overheads - Budgeted Fixed overheads

Absorbed Fixed overheads = Actual Weight x Actual Hours x Fixed overhead Rate

= 525 x 38 x 2.75 = $54,862.50

Production volume variance = 54862.50 - 55,000 = $137.50 (U)

3. Variable overhead rate variance is the difference in the budgeted rate per average weight & actual rate per weight of horse. Such a rate variance may be caused due to the extra cost of indirect labor incurred or changes in technology.

4. Variable overhead efficiency variance can be caused due to the more hours worked than the standard required for the job to be done which is the indicator of employees being less efficient as they took more hours to complete the same job.