QUESTION 3 ABC Variance Analysis (10 marks)

Dough-eez Donuts makes donuts for food trucks in the area. The donuts are made in standard batches of 100 donuts. To bake a batch of donuts, the production manager must setup the mixers and ovens. Setup costs are batch-level costs because they are associated with the batches of donuts made rather than the individual donuts made.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The original static budget plan for April was to produce 11,500 donuts. However, with sudden closure of in-dining due to COVID, the food truck business soared and actual production was increased to 14,300 donuts.

The following information also relates to April.

Actual Static budget

Amounts Amounts

Batch size (number of donuts per batch) 110 100

Setup hours per batch 3.4 4

Variable overhead cost per setup hour $33 $30

Total fixed setup overhead costs $39,240 $43,700

Required:

a. Calculate the rate and efficiency variances for variable setup overhead costs. (3 marks)

b. Calculate the rate and production-volume variances for fixed setup overhead costs. (3 marks) (continued on next page)

1. The production manager would like you to explain the variable overhead efficiency variance. Your explanation should include more than that it was favourable or unfavourable. It should explain the following using quantitative and qualitative analysis:
   1. What the variance means in relation to the actual versus budgeted production. (1 mark)

How much of the variance is due to change in batch size and how much is due to change in setup hours per batch. (3 marks)