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)