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 labour, depreciation on the barn, and advertising, are fixed. Both variable and fixed overhead are allocated to each horse guest-week using the standard weight of the horse in kilograms (kg) as the basis of allocation.

HHS budgeted amounts for August 2015 were:

Horse guest-weeks.................................................40

Average weight per horse....................................500 kg

Variable overhead cost per kilogram of horse..........$0.40/kg

Fixed overhead rate........................................$2.75/kg

Actual results for August 2015 were:

Horse guest-weeks.................................................38

Average weight per horse....................................525 kg

Actual variable overhead....................................$ 7,500

Actual fixed overhead.....................................$ 50,000

Required

1. Calculate the variable overhead rate and efficiency variances and indicate whether each is favourable (F) or unfavourable (U).

2. Calculate the fixed overhead rate and production-volume variances and indicate whether each is favourable (F) or unfavourable (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?