David has employed as a mangerial accountant at Peperonia, a manufacturer of exquisite glass serving bowls. The materials used for the bowls are inexpensive, but the process is labour intensive. The supervisor decided to use cheaper labour this period to see whether costs could be reduced. David needs to prepare a report for her supervisor about how effective operations had been during the month of January. She had set the following standards.

Cost per unit

Direct materials 3 kg @ $2.50 $07.50

Direct labour 5 hours @ $15 75.00

Factory overhead:

Variable $3 per direct labour hour 15.00

Fixed $20 per unit 20.00

Variable overhead is allocated by labour hours and fixed overhead is allocated by unit. Estimated production per month is 8000 units (40000 direct labour hours) with fixed overhead expenditure budgeted at $160000.

Records for January, based on production of 7800 units, indicated the following:

Direct materials purchased 25000 kg @ $2.60

Direct materials used 23100 kg

Direct labour 40100 hours @ $14.60

Variable overhead $119000

Fixed overhead $180000

Required

Prepare a flexible budget to enable assessment of the strategy undertaken by management.

Discuss the variances and recommend whether any of them should be investigated further.