Question 3 You are the accountant in a medium-sized, family-run business which manufactures auto parts. The business has recently undergone some senior management changes. Stanley Brown, who established the company in the early 1970's died unexpectedly and his son, Bruce, has taken over the day-to-day running of the business. Bruce does not have a business background, and despite being familiar with the business in general, he is having trouble understanding some regular management accounting reports. He has been reviewing the following extract from a monthly variance analysis report that you prepared: Budgeted profit for May Sales price variance Sales volume variance Materials usage variance Materials price variance Labour efficiency variance Labour rate variance Fixed overhead expenditure variance Fixed overhead volume variance Actual profit for May 66,000 (12,500) 14,000 (3,000) 400 8,900 (6,200) 700 (1,500) 66,800 Bruce is confused about the level of adverse variances this month, particularly in sales and labour. He thought that the company had enjoyed a good month as profits were ahead of target. He has asked you to help him to interpret the above report. Requirement Discuss the following which should provide: (a) A brief explanation of the purpose and benefits of variance analysis. 4 Marks (b) A simple explanation of how the sales and labour variances listed above are calculated. 6 Marks (c) Suggestions of possible causes which might give rise to the significant variances in sales volume/price and labour rate/efficiency listed above. 7 Marks (d) Suggestions of actions which might help reduce the scale of the adverse sales and labour variances. 8 Marks Total 25 Marks