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Question 3 Greenstone Ltd is a long established pottery company based in Stoke-on-Trent that specializes in producing high-quality coffee mugs. The company has a standard costing system in place and the standard cost card for 2020 is shown below: Imug Selling price 15.00 Direct materials (0.5kg x 5fkg) (2.50) Direct labour (0.2hours x 12Ihour) (2.40) Variable overhead (0.2hours x 5i'hour) (1.00) Fixed overhead {3.50) Standard prot 5.60 Budgeted sales are 7,000 mugs per month throughout the year, giving a budgeted monthly absorption costing profit of 39,200. At a board meeting in June the Sales Director told the Production Director that the company was supplying too many faulty mugs to customers and that it was starting to affect sales. The Production Director stated that the mugs were already inspected during the production process and as many faulty mugs as possible Were identified at that point. However she agreed that there was a problem and that she would devise a plan to improve the situation. The board agreed that the Production Director should be allowed to implement her plan to improve the quality of the production process during July and that they Would review the results after the month had finished. The Production Director therefore began to put her plan into action at the start of the month, leading to the following actual results for July: Sales revenue 99,2900 Direct materials (2,700kg) (16,740) Direct labour (1,215 hours) (18,225) Variable overhead: (6,075) Fixed overhead: 126,500) Profit 32,360 Actual production and sales during July Were both 6,750 mugs. In a meeting to review July's results the Sales Director suggested that they showed that the Production Director's plan had failed. However the Finance Director cautioned that the board should be careful about coming to premature conclusions. Required: a) Calculate the following variances for July: (i) Direct material price (ii) Direct material usage (iii) Direct labour rate (iv) Direct labour efciency (v) Variable overhead expenditure (vi) Variable overhead efficiency (vii) Fixed overhead expenditure (viii) Fixed overhead volume (18 marks) b) Outline possible causes for THREE of the variances calculated in part a) that may be as a result of action taken by the Production Director. (3 marks) 0) Explain the term 'Standard Costs'. State the main use of Standard Costs. (4 marks)