National Paints Limited (Nat Paints) is listed on the Johannesburg Stock Exchange (JSE) and manufactures paints in bulk for general painting purposes. Nat Paints paints are sold to wholesalers of building material and can be found in all hardware stores in the South Africa. The company uses standard costing for management and control. Paint is manufactured from mixing two main ingredients; a solvent and pigment additives. The solvents main function is to give the paint its surface-sticking ability, while the pigment additives mainly give paint its colour. The solvents used by Nat Paints are water based, which is a distinguishing factor in the industry which is dominated by oil based solvents. Management is currently busy assessing results for quarter two ended 30 June 2020 and planning for the third quarter ending 30 September 2020. The solvent and pigment additives are mixed in the proportion of two parts solvent to three parts pigment additives to produce a standard 200 litre drum of paint. This mixture can be varied to influence output. The companys paint is sold in these aforementioned standard drums at a budgeted selling price of R3 000 per drum; providing a standard gross profit margin of 40% per drum

The standard quantity, price/rate and cost information per 200 litre drum of paint is as follows: Cost element Input Cost/Rate per input Cost per drum Material Solvent 80 R10 per R800 Material Pigment additives ? R6 per ? Direct labour 0.25dlh R340 per dlh R85 Variable overhead 0.15mh R800 per mh R120 Fixed overhead 0.15mh ? per mh ? Note: = litre dlh = direct labour hour/s mh = machine hour/s The abovementioned standard quantity machine hours per standard 200 litre drum of paint is based on the factory clocking 4 800 machine hours per quarter. At this production level (the normal volume), the total budgeted manufacturing overhead amounts to R6 240 000. As evident from the above; the company uses machine hours to allocate manufacturing overhead. Inventory policy Nat Paints uses and valuates its inventory on a first-in-first-out (FIFO) basis. Inventory levels at the beginning and end of the second quarter were as follows: Inventory item 1 April 2020 30 June 2020 Paint Finished product 4 800 drums 7 125 drums Work In progress (see below) 3 800 drums 5 000 drums Raw material Solvent 256 000 1 652 312 Raw material Pigment additives 384 000 1 498 777 The work in progress at the beginning of the quarter had absorbed 30% of the material and 45% of the conversion costs; whilst closing work in progress had absorbed 90% of the material and 40% of the conversion costs. Actual results Management have just received the following actual results of the second quarter ending 30 June 2020 and are currently busy analysing these results: The company bought 5 608 220 litres of solvent at a cost of R11.50 per litre and 6 048 443 litres of pigment additives at a total cost of R30 242 215. Nat Paints sold 38 295 drums of paint during the second quarter earning total revenue totalling to R119 480 400. The direct labourers have clocked a total of 8 296 hours. Since labour rates have been fixed with unions, Nat Paints was paying the budgeted rate for labour.

During the first month of the second quarter, Eskom implemented load shedding that have led to some machine downtime. Management invested in a diesel powered power backup system at the beginning of May. Thus; whenever load shedding occurred, the company did not lose valuable production time. Machines ran for 7 187 hours during the second quarter. Variable manufacturing overhead totalled R6 037 080 and fixed manufacturing overhead R2 874 800 for the second quarter. Total selling and administration expenses for the period were R2 000 000. REQUIRED: Write a report to management of Nat Paints in which you (i) calculate and interpret all variances in detail; and (ii) identify and discuss the likely causes of all variances.