Highfields Ltd manufactures outdoor chairs for the domestic market using a highly automated process. The company uses a standard costing system for planning and control purposes and has prepared a standard cost sheet based on a practical capacity (denominator level) of 20,000 chairs (200,000 machine hours).

Standard Cost Sheet

Direct Materials (12 kg @$7.50 per kg)..................................... $90.00

Direct Labour (6 hours @ $10.00 per hour).................................. $60.00

Variable Overhead (10 machine hours @ $4.00 per machine hour) ............ $40.00

Fixed Overhead (10 machine hours @ $5.00 per machine hour)................. $50.00

Standard cost per barbecue $240.00

The Manufacturing Department Budget was prepared based on the forecast need to manufacture 19,000 chairs. During the year, 19,500 chairs were actually made.

At year end, the manufacturing department (cost) performance report is as below:

	Actual	Master Budget @ Std Cost	Variance
Number of units	19,500	19,000	500
Direct Materials	$1,976,500	$1,710,000	$266,500 U
Direct Labour	$1,116,000	$1,140,000	$24,000 F
Variable Overhead	$861,000	$760,000	$101,000 U
Fixed Overhead	$970,000	$950,000	$20,000 U
Total	$4,923,500	$4,560,000	$363,500 U

After viewing the report, the company CEO was concerned. He wants to know what is going on in the Manufacturing Department. The accountant has directed you to investigate the variances further. As part of your investigations, you have discovered the following:

• 335,000 kg of raw materials were purchased and used during the year;
• 72,000 direct labour hours were worked during the year;
• 210,000 machine hours were worked during the year;
• During the year a factory supervisor retired and was not replaced;
• Defective materials delivered by a supplier had gone undetected before use in production. This defective material caused the additional use of 30,000 kg of raw materials; 1,000 labour hours, and 2,500 machine hours to meet the required production.

REQUIRED:

• a. Calculate the following manufacturing variances for:

1. Direct materials price variance based on usage
2. Direct materials efficiency variance
3. Direct manufacturing labour price variance
4. Direct manufacturing labour efficiency variance
5. Variable manufacturing overhead spending variance
6. Variable manufacturing overhead efficiency variance
7. Fixed overhead spending variance
8. Production volume variance

Indicate whether each variance is favourable or unfavourable. (27 marks)

b.Provide a short statement to the CEO regarding the potential causes of the following variance and a practical recommendation to address each variance:

• direct materials efficiency variance (4 marks)
• labour efficiency variance (4 marks)
• variable overhead efficiency variance (4 marks)