Sweet Tooth Temptations makes cupcakes in batches. To manufacture a batch of cupcakes, Brenda, the master baker, must setup the measuring and mixing machines. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up measuring and mixing machines for different flavours of cupcakes.

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 following information pertains to March.

Static-budget Actual

Amounts Amounts

Cupcakes produced and sold 25,000 28,000

Batch size (number of cupcakes per batch) 200 224

Setup hours per batch 2.0 1.8

Variable overhead cost per setup hour $60 $62

Total fixed setup overhead costs $25,500 $30,000

Required:

a. Calculate the rate and efficiency variances for variable setup overhead costs.

b. Calculate the rate and production-volume variances for fixed setup overhead costs. (4 marks)

c. Explain the variable overhead efficiency variance. Your explanation should include more than that it was favourable or unfavourable. It should discuss a credible reason as to why. (2 marks)