Beata Floral Creations, Inc., makes jewelry in the shape of flowers. Each piece is handmade and takes an average of 1.5 hours to produce because of the intricate design and scrollwork. Beata uses direct labor hours to allocate the overhead cost to production. Fixed overhead costs, including rent, depreciation, supervisory salaries, and other production expenses are budgeted at $ 9,000 per month. These costs are incurred for a facility large enough to produce 1,000 pieces of jewelry a month. During the month of February, Beata produced 600 pieces of jewelry and actual fixed costs were $ 9,200.

1. Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U).
2. If Beata uses direct labor hours available at capacity to calculate the budgeted fixed overhead rate, what is the production- volume variance? Indicate whether it is favorable (F) or unfavorable (U).
3. An unfavorable production- volume variance is a measure of the underallocation of fixed overhead cost caused by production levels at less than capacity. It therefore could be interpreted as the economic cost of unused capacity. Why would Beata be willing to incur this cost? Your answer should consider separately the following two unrelated factors:
a. Demand could vary from month to month while available capacity remains constant.
b. Beata would not want to produce at capacity unless it could sell all the units produced. What does Beata need to do to raise demand and what effect would this have on profit?
4. Beata’s budgeted variable cost per unit is $ 25 and it expects to sell its jewelry for $ 55 apiece. Compute the sales- volume variance and reconcile it with the production- volume variance calculated in requirement 2. What does each concept measure?

  • CreatedJanuary 15, 2015
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