Linsil has produced the following operating statement reconciling budgeted and actual gross profit for the last three months, based on actual sales of 122 000 units of its single product:

The standard direct costs and selling price applied during the three-month period and the actual direct costs and selling price for the period were as follows:

After the end of the three-month period and prior to the preparation of the above operating statement, it was decided to revise the standard costs retrospectively to take account of the following:1. A 3 percent increase in the direct material price per kilogram;2. A labour rate increase of 4 percent;

3. The standard for labour efficiency had anticipated buying a new machine leading to a 10 percent decrease in labour hours; instead of buying a new machine, existing machines had been improved, giving an expected 5 percent saving in material usage.

Required:(a) Using the information provided, demonstrate how each planning and operational variance in the operating statement has been calculated.(b) Calculate direct labour and direct material variances based on the standard cost data applied during the three-month period.(c) Explain the significance of separating variances into planning and operational elements, using the operating statement above to illustrate your answer.(d) Discuss the factors to be considered in deciding whether a variance should be investigated.

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Operating statement £ £ Budgeted gross profit Budgeted fixed production 800 000 352000 overhead 1152000 Budgeted contribution Sales volume contribution 19200 variance Sales price variance (61000) (41800) 1110200 Actual sales less standard variable cost of sales Planning variances Variable cost variances Favourable Adverse Direct material price Direct material usage 23570 42090 76128 Direct labour rate Direct labour efficiency 203333 42090 303031 (260941) Operational variances Variable cost variances Adverse Favourable Direct material price Direct material usage 31086 14030 19032 Direct labour rate Direct labour efficiency 130133 144163 50118 94045 943304 Actual contribution Budgeted fixed production (352000) overhead Fixed production overhead expenditure variance 27 000 Actual fixed production (325000) overhead Actual gross profit 618304 Standard Actual Selling price (£/unit) Direct material usage (kg/unit) Direct material price (£/kg) 31.50 31.00 3.00 2.80 2.30 2.46 Direct labour efficiency (hrs/unit) Direct labour rate (£/hr) 1.25 1.30 12.00 12.60