Yan Floral Creations Inc. makes jewellery in the shape of flowers. Each piece is hand-made and takes an average of 1.5 hours to produce because of the intricate design and scrollwork. Yan uses direct labour-hours to allocate the overhead cost to production. Fixed overhead costs, including rent, amortization, supervisory salaries, and other production expenses, are budgeted at $9,000 per month. These costs are incurred for a facility large enough to produce 1,000 pieces of jewellery a month.

During the month of February, Yan produced 600 pieces of jewellery and actual fixed costs were $9,200.

Required

1. Calculate the fixed overhead rate variance and indicate whether it is favourable (F) or unfavourable (U).

2. If Yan uses direct labour-hours available at capacity to calculate the budgeted fixed overhead rate, what is the production-volume variance? Indicate whether it is favourable (F) or unfavourable (U).

3. An unfavourable production-volume variance is a measure of the underallocation of fixed overhead cost caused by production levels at less than capacity. It therefore could be interpreted as the economic cost of unused capacity. Why would Yan be willing to incur this cost? Your answer should separately consider the following two unrelated factors:

a. Demand could vary from month to month while available capacity remains constant.

b. Yan would not want to produce at capacity unless she could sell all the units produced. What does Yan need to do to raise demand and what effect would this have on profit?

4. Yan budgeted variable cost per unit is $25 and she expects to sell the jewellery for $55 apiece. Calculate the sales-volume variance and reconcile it with the production-volume variance calculated.