Question 3 (23 marks) Mr. Cheung has instructed his chief accountant to prepare a contribution income statement showing the comparison of the actual performance for the year ended December 31 2021 with the master budget. The master budget was fixed at the beginning of the year 2021. The company's costing system for manufacturing has two direct-cost categories (direct material and direct labour-both variable) and two production overhead cost categories (variable and fixed manufacturing overhead). Assume there were no beginning and ending inventory. The division adopts direct labour hours as the allocation base for manufacturing overhead. The contribution income statement (ignore non- production cost) and other information is shown below. Contribution Income Statement Static Actual Budget Number of units produced and sold 40,000 46,000 $ $ Sales 400,000 450,800 Variable cost: Direct Material Direct Labour Production cost Contribution Margin Fixed Cost Production Overhead Operating Profit (140,000) (165,660) (80,000) (82,500) (32,000) (32,000) 148,000 202640 (40,000) (46,000) 108,000 156,640 Additional Information Direct Material $1/kg @3.5 kg Direct labour $50/hr @0.04hr Variable Manufacturing Overhead $20/hr@0.04 hr Fixed Manufacturing Overhead $25/hr@ 0.04 hr Actual quantity of direct materials purchased and used Actual cost of direct material (per kg) Actual cost of direct labour (per hour) Denominator level hours. Standard Cost per unit $3.5 $2.0 $0.8 $1 150,600 kg $1.1/kg $55/hour 1600 hours Required: (1) Revise the income statement by preparing a flexible budget and calculate the related flexible budget variances. (8 marks) (2) Determine the following appropriate variances to supplement the flexible budget report for the year in part (1). Explain possible causes of those variances briefly. (a) Direct material price and efficiency variance (b) Direct labour price and efficiency variance (c) Variable overhead spending and efficiency variance (d) Fixed Overhead budget and production volume variance (15 marks)