Chloe sells just one type of lipsticks. For a number of years the sales were decreasing but due to new Kardashian TV programme the demand has again picked up. Chloe is however worried about the large adverse variances.

The company has prepared the following report for the year ending 31 July 2021.

Details
Budget
Actual
Variance
 
Production/Sales (units)
10,500
14,000
3,500
F
Sales revenue (£)
126,000
  166,600
40,600
F
Direct material (£)
52,500
58,000
5,500
A
Direct labour (£)
31,500
34,200
2,700
A
Production overheads (£)
26,000
30,000
4,000
A
Selling and distribution costs (£)
10,200
10,500
300
A
Administration costs (£)
4,200
4,800
600
A
Total costs (£)
124,400
137,500
13,100
 
A Profit (£)  
1,600
   29,100
27,500
F
 

The following point have been revealed concerning the budget:

• Production overheads are £37,000 at the maximum annual capacity of 16,000 units. The production overhead comprises of a fixed and a variable element.
 

Required:

 

(a) Compute flexed budget with actual quantity. 

(b) Compute variances and comment on them. 

(c) Explain two plausible reasons for your direct labour and direct material variance.