The CEO of New Look Jackets Inc. (NLJ) was reviewing the 2019 operating results (see Exhibit I). He was pleased to see that sales and net income were higher than budgeted, but he had a feeling that the aggregated numbers were hiding some information. He decided to call in you, CPA, the company's newly hired controller, to ask for an explanation of the variance he is seeing.

NLJ produces and sells two lines of jackets, one made of nylon and one made of leather. The market for nylon jackets is large and competitive, but the leather jacket market has traditionally been small, with only a few competing manufacturers. During 2019, fashion trendsetters highlighted leather jackets, creating an increase in demand. Unfortunately, NLJ did not foresee this trend and, as a result, had under-budgeted sales demand.

The increased demand for leather jackets created great turmoil in the production plant. Supply of direct materials had been contracted at the beginning of the year based on the budgeted requirements at standard quantities: 2.5 metres at a cost of $20 per metre for leather, and 2.8 metres at $2.50 per metre for nylon. While nylon remained stable, NLJ's buyers had to purchase the increased requirements for leather from various new sources, some of which proved to be unreliable and more expensive. The average cost of leather was $21 per metre.

Workers skilled in cutting and sewing leather are normally paid $20/hour and work for two hours on each jacket. Nylon requires less skill, and these workers are paid $8 per hour and require one hour for each jacket. As skilled workers were scarce, the production manager had to hire and train inexperienced