Chapter 8, Problem 8.31E

Production-volume variance analysis and sales-volume variance. 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.

1. A. Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U).

  Required

1. B. 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).
2. C. 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?
3. D. 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?