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Question 2: Vita Ltd is a manufacturer of various products including one that is marketed as Vitagold. The company has developed standard costs for one
Question 2: Vita Ltd is a manufacturer of various products including one that is marketed as Vitagold. The company has developed standard costs for one bottle of Vitagold, as follows: Standard price Standard Standard quantity cost or rate Direct materials 3.5 litres 12.00 per litre 42.00 Direct labour 2.5 hours 14.50 per hour 36.25 Variable manufacturing overhead 2.5 hours 4.40 per hour 11.00 Total standard cost 89.25 During May, the following activity was recorded by the company in relation to the production of Vitagold: Materials purchased were 16,000 litres at a cost of 195,200. There were no beginning stocks of materials on hand to start the month. At the end of the month, 1,200 litres of material remained in the warehouse unused. The company employs 70 skilled workers to work on the production of Vitagold. During May, eac of them worked an average of 150 hours at an average rate of 15 per hour. Variable manufacturing overhead is assigned to Vitagold on the basis of direct labour-hours. Variable manufacturing overhead costs incurred during May totalled 46,725. During May, 4,250 bottles of Vitagold were produced. Required: a) Compute the following variances for May: i. Direct materials price and quantity variances. ii. Direct labour rate and efficiency variances. iii. Variable overhead spending and efficiency variances. b) Identify two possible reasons for each of the variances that you have computed above. c) Explain what is meant by the term 'management by exception' and discuss the usefulness of standard costs in facilitating this process
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