X Ltd uses an automated manufacturing process to produce an industrial chemical, Product P. X Ltd operates a standard marginal costing system. The standard cost data for Product P is as follows: 

Standard cost per unit of Product P 

Materials 

A 10 kg @ £15 per kilo .................................................................        £150 

B 8 kg @ £8 per kilo .............................................................................. £64

C 5 kg @ £4 per kilo ...........................................................................    £20 

23 kg 

Total standard marginal cost ............................................................. £234 

Budgeted fixed production overheads ..........................................  £350,000 

In order to arrive at the budgeted selling price for Product P the company adds 80% mark-up to the standard marginal cost. The company budgeted to produce and sell 5000 units of Product P in the period. There were no budgeted inventories of Product P. The actual results for the period were as follows: 

Actual production and sales ......................................................      5450 units 

Actual sales price .....................................................................         £445 per unit 

Material usage and cost 

A 43,000 kg ........................................................................................... £688 000 

B 37,000 kg ........................................................................................... £277,500 

C 23,500 kg ...........................................................................................   £99,875 

                                                                                                                    103,500 kg 

Fixed production overheads ...........................................................    £385,000 

Required

1. Prepare an operating statement which reconciles the budgeted profit to the actual profit for the period. The statement should include the material mix and material yield variances. 

2. The Production Manager of X Ltd is new to the job and has very little experience of management information. Write a brief report to the Production Manager of X Ltd that: 

a. Interprets the material price, mix and yield variances; 

b. Discusses the merits, or otherwise, of calculating the materials mix and yield variances for X Ltd.