Case Study

Alkozay Ltd. Manufactures started production of its new product line (shirts) in the month of November, which it sells to customers for embroidering with various slogans and emblems. The standard cost card for the shirts is as follows.

	Standard Price	Standard Quantity	Standard Cost
Direct materials	AFN 1.60 per yard	1.25 yards	AFN 2.00
Direct labor	AFN 12 per DLH	0.25 DLH	3.00
Variable overhead	AFN 4 per DLH	0.25 DLH	1.00
Fixed overhead	AFN 6 per DLH	0.25 DLH	1.50
AFN 7.50

Bilal Nabi, operations manager, was reviewing the results for November when he became upset by the unfavorable variances he was seeing. In an attempt to understand what had happened, Bilal Nabi asked CFO Muhammad Javid for more information. He provided the following overhead budgets, along with the actual results for November.

The company purchased and used 112,000 yards of fabric during the month. Fabric purchases during the month were made at AFN 1.45 per yard. The direct labor payroll ran AFN 249,260, with an actual hourly rate of AFN 12.10 per direct labor hour. The annual budgets were based on the production of 1,000,000 shirts, using 250,000 direct labor hours. Though the budget for November was based on 80,000 shirts, the company actually produced 82,000 shirts during the month.

Fixed Overhead Budget
	Annual Budget		NovemberActual
Supervisory salaries	AFN 260,000		AFN 22,000
Insurance	350,000		25,500
Property taxes	80,000		6,500
Depreciation	320,000		30,000
Utilities	210,000		21,600
Quality inspection	280,000		29,700
Total	AFN 1,500,000		AFN 135,300
Variable Overhead Budget
	Annual Budget	Per Shirt		November Actual
Indirect materials	AFN 450,000	AFN 0.45		AFN 36,000
Indirect labor	300,000	0.30		33,700
Equipment repair	200,000	0.20		16,400
Equipment power	50,000	0.05		12,300
Total	AFN 1,000,000	AFN 1.00		AFN 98,400

Requirement:

• Calculate and determine the direct materials price and quantity variances for the month of November.
• Calculate and determine the direct labor rate and efficiency variances for the month of November.
• Calculateanddeterminethevariableoverheadspendingandefficiencyvariancesfor the month of November.
• Provide a brief explanation of the possible causes of each variance in direct material, direct labor and overhead variance.