Question 1

Home Security Designs Ltd manufactures fences for homes. A certain fence requires the following:

Direct materials standard 10 metres at $5 per metre

Direct labour standard 5 hours at $10 per hour

Budgeted fixed overheads $120,000 per year

During 2019, the company made 1,500 fences and used 14,000 metres of materials costing $68,600. Direct labour totaled 7,600 hours for $79,800. Fixed overheads were $118,000.

Required (show your workings for calculations & write in your own words):

(a) Compute the direct materials price variance, efficiency variance and flexible budget variance for the year. (1.5 points)

(b) Compute the direct labour price variance, efficiency variance and flexible budget variance for the year. (1.5 points)

(c) Describe one possible cause for the variances you calculated above (4 points):

(i) Direct materials price variance

(ii) Direct materials efficiency variance

(iii) Direct labour price variance

(iv) Direct labour efficiency variance

(d) Managers should be rewarded for favourable variances and punished for unfavourable variances. Do you agree? Explain. (3 points)