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.

(14 marks)

(b)Compute variances and comment on them.

(12 marks)

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

(4 marks)