Read the case study and answer the questions below

It is now July 2021 and the new production facility for hybrid mattresses became operational on 1 June 2021. Una Volk, Finance Manager, telephones you and says:

"Ben De Luca, Chief Executive Officer, has asked for an explanation of the fixed production overhead variances for the new production facility for June 2021. He has also queried the usefulness of these variances for controlling fixed production overhead. This is the first month that the new facility has been operational. There were some unforeseen costs associated with insuring and safety testing the building that occurred in June and there was a delay in employee training. It had been expected that the direct workforce would be made up of 10 new inexperienced employees and 15 experienced employees transferred from the main production facility. In reality there were 20 new and 8 transferred employees. An additional supervisor was also appointed.

Ben has sent me two queries regarding some of the non-current assets in the new production facility.

Required:

Una provides you a schedule of information which you will see in the next two pages.

Using the information on the next two pages, prepare briefing note for Ben which includes:

1. An explanation of what each of the fixed production overheads variances mean and reasons why each variance has occurred. Please also explain any limitations of using these variances to control the fixed production overheads at the new facility.

For Question 1

Fixed production overhead variances for the new production facility for June 2021

Variance	E$	Adverse / Favourable
Expenditure	10,813	Adverse
Capacity	7,673	Favourable
Efficiency	4,185	Adverse

Note:

Due to a pending review of our costing approach across the business, it was decided to temporarily use a facility- wide fixed production overhead absorption rate based on direct labour hours for the new production facility. This budgeted rate is E$18.60 per direct labour hour.