OrtezzanoFood Company (OFC), located in Ortezzano,Marche, was owned by Antonio'ssecondcousin,GiancarloRicci.Amongother things,OFC produced extra-virginoliveoil bottles.Giancarlo often used Antonio and his staff in Montelparo when he needed help interpreting hisfinancialdata.

GiancarlocalledAntonioin a state of frustration,"Overall,we did well in sales,althoughI don'tunderstand our variances.We exceeded our sales budget by $4000. I think it is because of ourpromotionduringthe holidayseason when we lowered our price by $1 per bottle from our budget.We ended up selling 500 more bottles than the budgeted volumeof 6000 bottles. What I don'tunderstand is our overhead costs. We had budgeted $48,000 in fixed overhead and $24,000 forvariableoverhead last year. Our actual overhead numbers were exactly what we expected, but theproductionmanagerisarguingthathedeservesabonusbecausehehasbeenefficientthisyear."

"Whydoestheproductionmanagerthinkhehasbeenefficient?"probedAntonio.

"The production manager claimshe helped meet our promotion goal by producing 500 morebottles of oliveoil thanwe budgeted.Moreover, he claimsthathe producedthem more efficiently.To back up his claim, he showed that he was able to produce 0.52 bottles of olive oil per directlaborhour,whichwas0.02morethanthestandardrateofproduction,"respondedGiancarlo.

"Areyouusingfullabsorptioncosting?Andhowdoyouallocateyouroverheads?"askedAntonio.

"Yes, we use full absorption costing. We allocate the variable overhead based on the budgetedvolumeofdirect labor hours. We allocate the fixed overhead based on our plant's maximalfeasiblecapacity, which is 7000 bottles of oliveoil.I think our sales managerdeserves a bonus. But I don'tsee why theproductionmanager shouldget a bonusif hisnumbers came in righton target. I believehe only deserves a reward if he can exceed expectations, and he certainly doesn't appear to have donethat!"

Question 1

Perform a variance analysis for the revenues at OFC to explain the differences between actual and budgeted revenues. Label each variance, indicate favorable and unfavorable and explain what each represents economically.

Question 2

Perform a variance analysis for the variable OH to explain the differences between actual VOH and budgeted VOH. Label each variance, indicate favorable and unfavorable and explain what each represents economically.

Question 3

What is the fixed cost production volume variance at OFC? What does it represent economically? Is the variance favorable or unfavorable? Who, in your view, should be held responsible for this variance?

Question 4

Do you think the production manager at FCPC deserves a bonus? Why or why not?