SS Ltd makes and sells a single product "PP". The company uses a standard absorption costing system.

The budgeted production and sales for the year ended 31 October 2001 were 59,500 units with a selling price of £2 each unit. The standard time for producing each unit was 3 minutes. The standard labour rate was £10 an hour. The standard material cost for one unit ofPP was £0.75 per unit.

Production overhead absorption rates were based on direct labour cost and were as follows:

Variable overhead 35% of direct labour cost Fixed overhead 40% of direct labour cost For the year under review, the actual results were as follows:
Production and sales of PP 62,000 units £
Selling price for one unit 2.00 Labour cost incurred - for 3,500 hours 38,500 Material cost for each unit 0.75 Variable production overhead incurred 9,500 Fixed production overhead incurred 9,500 There were no changes in any stock levels during the period.

Required:

(a) Prepare a statement that reconciles budgeted profit with actual profit for the year ended 31 October 2001, showing the analysis of variances in as much detail as possible from the information given. (14 marks)

(a) Referring to your analysis in part (a), suggest two possible reasons for the labour efficiency variance and two possible reasons for the labour rate variance that you have calculated.
(4 marks)

(c) Explain the factors that should be considered when selecting the most appropriate base to use for an overhead absorption rate. Your answer should include a discussion of the method used by SS Ltd