Response to the following problem:
Causes of Indirect Variances: 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 2009 were:
Horse guest-weeks 40
Average weight per horse 900 lbs.
Variable overhead cost per pound of horse $0.20/lb
Fixed overhead rate $1.50/lb
Actual results for August 2009 were:
Horse guest-weeks 38
Average weight per horse 950 lbs
Actual variable overhead $7,500
Actual fixed overhead $50,000
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 spending 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 spending 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?