Question
Olympia Inc. produces small row boats. Standard cost information for each boat is presented below. Direct materials $ 325 Direct labor 210 Variable overhead 200
Olympia Inc. produces small row boats. Standard cost information for each boat is presented below. Direct materials $ 325 Direct labor 210 Variable overhead 200 Total $735 Olympia produced and sold 1,000 boats for the year and encountered the following production variances. Direct materials price variance ($50,000) Favorable Direct materials quantity variance 30,000 Unfavorable Direct labor rate variance 24,500 Unfavorable Direct labor efficiency variance (28,000) Favorable Variable overhead spending variance 19,500 Unfavorable Variable overhead efficiency variance (8,000) Favorable Total variable production cost variance ($12,000) Unfavorable Company policy is to investigate all unfavorable variances above 10 percent of the flexible budget amount for direct materials, direct labor, and variable overhead.
Required: a. Identify the variances that should be investigated according to company policy. Show calculations to support your answer. b. What potential weakness exists in the company's current policy?
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