QUESTION TWO Special Ice Water Ltd is a manufacturer of various products including one that is marketed as Pure- Aqua. The company has developed standard costs for one bottle of Pure-Aqua, as follows: Standard quantity Standard price or rate Standard cost Direct materials 7 litres 12.00 per litre 84.00 Direct labour 5 hours per hour 72.50 14.50 4.40 per hour 5 hours 22.00 Variable manufacturing overhead Total standard cost 178.50 [CONTINUED] BE113-5-SP4 During the month of May, the following activity was recorded by the company in relation to the production of Pure-Aqua: Materials purchased were 32,000 litres at a cost of 390,400. There were no beginning stocks of materials on hand to start the month. At the end of the month, 2,400 litres of materials remained unused in the warehouse. The company employs 70 skilled workers to work on the production of Pure-Aqua. During May, each of them worked an average of 300 hours at an average rate of 15 per hour. Variable manufacturing overhead is assigned to Pure-Aqua on the basis of direct labour- hours. Variable manufacturing overhead costs incurred during May totalled 93,450. During May, 4,250 bottles of Pure-Aqua were produced. Required: (a) Compute the following variances for May: Direct material price and quantity variances. Direct labour rate and efficiency variances. Variable overhead spending and efficiency variances. (24 Marks) (b) Identify two possible reasons for each of the variances that you have computed above. (12 Marks) (c) Explain what is meant by the term 'management by exception' and critically evaluate the usefulness of standard costs in facilitating this process. (14 Marks)