Sunny Day Company makes customized golf shirts for sale to golf courses. Each shirt requires 1.5 hours to produce because of the customized logo for each golf course. Sunny Day uses direct labor-hours to allocate the overhead cost to production. Fixed overhead costs, including rent, depreciation, supervisory salaries, and other production expenses, are budgeted at $15,600 per month. The facility currently used is large enough to produce 1,300 shirts per month. During March, Sunny Day produced 750 shirts and actual fixed costs were $11,400. Read the requirements. Requirements 1 & 2. Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U). If Sunny Day uses direct labor-hours available at capacity to calculate the budgeted fixed overhead rate, what is the production-volume variance? Indicate whether it is favorable (F) or unfavorable (U). Begin by determining the formula then computing the fixed overhead rate per direct labor hour. (Round the fixed overhead rate to the nearest cent.) Next, complete the following table. Actual Costs Incurred Static Budget Allocated Overhead Fixed overhead rate Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U). Spending variance Calculate the fixed overhead production-volume variance and indicate whether it is favorable (F) or unfavorable (U). Production-volume variance Requirement 3. An unfavorable production-volume variance could be interpreted as the economic cost of unused capacity. Why would Sunny Day be willing to incur this cost? Select all that apply. A. Basic economics provides a demand curve that shows a tradeoff between capacity and actual fixed overhead expenses. This creates an inherent cost of unused capacity over which Sunny Day has no control. B. For most products, demand does not vary from month to month. Sunny Day may be willing to incur the cost of unused capacity because it is easy to track and makes budgeting more convenient. C. Basic economics provides a demand curve that shows a tradeoff between price charged and quantity demanded. Potentially, Sunny Day could have lower net revenue if it produces at capacity and sells at a lower price than if it sells at a higher price at some level below capacity. D. For most products, demand varies from month to month. If Sunny Day wants to meet demand in high demand months, the company will have excess capacity in low demand months. Having some access capacity would allow Sunny Day to produce enough to cover peak demand as well as slack to deal with unexpected demand surges in non-peak months. Requirement 4. Grand Slam's budgeted variable cost per unit is $26, and it expects to sell its shirts for $54 apiece. Compute the sales-volume variance and reconcile it with the production-volume variance calculated in requirement 2. What does each concept measure? Begin by calculating the static-budget operating income for March. Revenues Variable costs Fixed overhead costs Static-budget operating income Next, calculate the flexible-budget operating income for March. Revenues Variable costs Fixed overhead costs Flexible-budget operating income Compute the sales-volume variance and indicate whether it is favorable (F) or unfavorable (U). Sales-volume variance Now, select the formula and enter the amounts to calculate the operating-income volume variance. Reconcile the sales-volume variance with the production-volume variance calculated in requirement 2. Sales-volume variance Operating-income volume variance What does each concept measure? The operating-income volume variance assumes that volume decreased by units. in fixed costs would be saved if production and sales Chart Hills Company makes customized golf shirts for sale to golf courses. Each shirt requires 3 hours to produce because of the customized logo for each golf course. Chart Hills uses direct labor-hours to allocate the overhead cost to production. Fixed overhead costs, including rent, depreciation, supervisory salaries, and other production expenses, are budgeted at $28,500 per month. The facility currently used is large enough to produce 5,000 shirts per month. During March, Chart Hills produced 4,200 shirts and actual fixed costs were $28,000. Requirements 1. Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U). 2. If Chart Hills uses direct labor-hours available at capacity to calculate the budgeted fixed overhead rate, what is the production-volume variance? Indicate whether it is favorable (F) or unfavorable (U). 3. An unfavorable production-volume variance could be interpreted as the economic cost of unused capacity. Why would Chart Hills be willing to incur this cost? 4. Chart Hills' budgeted variable cost per unit is $18, and it expects to sell its shirts for $35 apiece. Compute the sales-volume variance and reconcile it with the production-volume variance calculated in requirement 2. What does each concept measure? - (U)