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?