A company produces and sells one product only, the standards cost for which is:

K per unit

Direct material: $11$ litres at K$222$

Direct wages $5$ hours at K$630$

Variable overhead $10$

Fixed production overhead $20$

$\_\_\_\_$

Total standard production cost $82$

Standard gross profit $38$

$\_\_\_\_\_$

Standard selling price $120$

$=====$

The variable overhead is incurred in direct proportion to the direct labour hours worked. The unit rate for fixed production overhead is based on an expected annual output of $24,000$ units produced at an even rate throughout the year. Assume that each calendar month is equal and that the budgeted sales volume for May was $2,000$ units. The following were the actual results recorded during May:

Number of units produced and sold: $1,750$

K K

Sales revenue $218,750$

Direct materials: $19,540$ litres purchased and used $41,034$

Direct labour: $8,722$ hours $47,971$

Variable overhead $26,166$

Fixed production overhead $37,410$

$152,581$

$\_\_\_\_\_\_\_$

Gross profit $66,169$

$=======$

A cost accountant has analysed the cost and sales margin variances that occurred during the month and has presented the following profit reconciliation statement to you.

$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Profit Reconciliation Statement for May

$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

K K

Original budgeted profit: $2,000$ units x K$3876,000$

Total sales margin variance $750($A$)$

$\_\_\_\_\_\_$

$75,250$

Cost variances

Direct material: Price $1,954($A$)$

Usage $580($A$)$

$\_\_\_\_\_\_2,534($A$)$

Direct labour: Rate $4,361($F$)$

Efficiency $168($F$)$

$\_\_\_\_\_4,529($F$)$

Variable overhead Expenditure $8,722($A$)$

Efficiency $56($F$)8,666($A$)$

$\_\_\_\_\_\_$

Fixed overhead: Expenditure $2,590($F$)$

Volume $5,000($A$)$

$\_\_\_\_\_\_2,410($A$)$

$\_\_\_\_\_\_$

Actual gross profit $66,169$

$======$

$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$($a$)$ Explain the meaning of $$variance$$ together with an interpretation of $$favourable$$ and $$adverse$$ variances. $(6$ Marks$)$

$($b$)$ You have been asked to investigate variances that took place during the month. Identify the five $(5)$ main criteria that guide an investigation of variances and explain why each criterion is useful in providing this guidance. $(5$ Marks$)$

$($c$)$ Guided by the above criteria, identify five $(5)$ variances in the above reconciliation statement that require further investigation and explain potential causes of each variance. $(9$ Marks$)$