=+12-39 KKK Production-volume variance analysis and sales-volume variance OBJECTIVES 4, 6 Floral Creations Ltd makes jewellery in the shape of flowers. Each piece is hand-made and takes an average of 1.5 hours to produce because of the intricate design and scrollwork. Floral Creations uses direct labour-hours to allocate the overhead cost to production.

Fixed overhead costs, including rent, depreciation, supervisory salaries and other production expenses, are budgeted at $9000 per month. These costs are incurred for a facility large enough to produce 1000 pieces of jewellery a month.

During the month of February, Floral Creations produced 600 pieces of jewellery and actual fixed costs were $9200.

Required 1 Calculate the fixed overhead spending variance and indicate whether it is favourable (F) or unfavourable (U).

2 If Floral Creations uses direct labour-hours available at capacity to calculate the budgeted fixed overhead rate, what is the production-volume variance? Indicate whether it is favourable (F) or unfavourable (U).

3 An unfavourable 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 Floral Creations be willing to incur this cost? Your answer should separately consider the following two unrelated factors:

a Demand could vary from month to month while available capacity remains constant.

b Floral Creations would not want to produce at capacity unless it could sell all the units produced. What does Floral Creations need to do to raise demand and what effect would this have on profit?

4 Floral Creations’s budgeted variable cost per unit is $25 and it expects to sell its jewellery for $55 a piece. Calculate the salesvolume variance and reconcile it with the production-volume variance calculated in requirement 2. What does each concept measure?

502 Chapter 12: Flexible budgets, overhead cost variances and management control M12_HORN3377_02_LT_C12.indd 502 2/09/13 3:50 PM