Goody Limited produces a popular brand of bottled water. The standard manufacturing cost of product is:

Direct materials:

Water 500 ml @$0.10 $50.00

Bottles 1 @ $0.50 $0.50

Direct labour 0.2hr @$20 per hr $4.00

Variable overhead 0.2hr @ $5 per hr $1.00

Fixed overhead 0.2hr @$3 per hr $0.60

Standard cost per unit $56.10

During the past month, 80,000 bottles were produced. Actual activity for the month follows:

Forty-five million ml (45,000 ml) of water was purchased at an average price of $0.08 per ml.

85,000 bottles were purchased at a total cost of $46,750. At the end of the month, 4,000 bottles remained in inventory.

Direct labour hours totalled 15,540, with total cost $334,110.

Management has decided to investigate only those variances that are greater than 10% of the standard cost for each category.

Required:

Compute the following variances. In each case, clearly state whether the variance is favourable (F) or adverse (A)

Direct materials (bottles) price variance

Direct materials (bottles) efficiency variance

Direct labour rate variance

Direct labour efficiency variance (10 marks)

Based on the policy stated above, explain which (if any) of the variances calculated should be investigated. (10 marks)