CONTROL LIMITS, VARIANCE INVESTIGATION

Goodsmell Company produces a well$-$known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet:

Direct materials:

Liquids $(4\mathrm{.}2$ decilitres @ $$0\mathrm{.}25)$ $$1\mathrm{.}05$

Bottles $(1$ @ $$0\mathrm{.}05)0\mathrm{.}05$

Direct labour $(0\mathrm{.}2$ hr$.$ @ $$12\mathrm{.}50)2\mathrm{.}50$

Variable overhead $(0\mathrm{.}2$ hr$.$ @ $$4\mathrm{.}70)0\mathrm{.}94$

Fixed overhead $(0\mathrm{.}2$ hr$.$ @ $$1\mathrm{.}00)0\mathrm{.}20$

Standard cost per unit $$4\mathrm{.}74$

Management has decided to investigate only those variances that exceed the lesser of $10$ percent of the standard cost for each category or $$20,000.$

During the past quarter, $250,000$ four decilitre bottles of cologne were produced.

Descriptions of actual activity for the quarter follow:

A total of $1\mathrm{.}15$ million decilitres of liquids was purchased, mixed, and processed. Evaporation was higher than expected $($no inventories of liquids are maintained$).$

The price paid per decilitre averaged $$0\mathrm{.}27.$

Exactly $250,000$ bottles were used. The price paid for each bottle was $$0\mathrm{.}048.$

Direct labour hours totalled $48,250,$ with a total cost of $$622,425.$

Normal production volume for Goodsmell is $250,000$ bottles per quarter. The standard overhead rates are computed by using normal volume. All overhead$-$costs are incurred uniformly throughout the year.

Required:

$1.$ Calculate the upper and lower control limits for each manufacturing cost category. $2$ Marks

$2.$ Compute the total materials variance, and break it into price and usage variances. Would these variances be investigated? $2$ Marks

$3.$ Compute the total labour variance, and break it into rate and efficiency variances. Would these variances be investigated? $2$ Marks