The Port Pirie plant of Locost Manufacturing Limited produces waffle irons for domestic use. These waffle irons sell for $50.00 each. The plant uses a standard cost system for production costing and control purposes. The standard product costs assigned to a waffle iron appears below:

The Port Pirie plants planned production and budgeted sales for the coming year was 45,000 waffle irons. The basis for the standard variable overhead rate and the standard fixed overhead rate was planned annual production expressed in standard direct labour hours (i.e. 36,000 direct labour hours in total).

During the year, the Port Pirie plant experienced the following actual production activity.

i. Production of waffle irons totalled 50,000 units. All of these waffle irons sold at a price of $50 each.

ii. The Port Pirie plant purchased a total of 130,000 kilogram of raw materials at a cost of $3.70 per kilogram during the year.

iii. There were 25,000 kilograms of raw materials in beginning inventory carried at a cost of $4.00 per kilogram. There was no ending inventory of raw materials.

iv. The plant used 41,000 direct labour hours at a total cost of $533,000.

v. Actual fixed overhead totalled $95,000. vi. Actual variable overhead totalled $250,000.

Required

(a) Present the sales and cost volume variances in a tabular format.

(b) Present the flexible budget variances in a tabular format.

(c) Compute the raw materials price and usage variances.

(d) Compute the direct labour price and usage variances.

(e) Compute the variable overhead price and usage variances. Explain the relationship between the variable overhead price and usage variances and the direct labour price and usage variances. Comment on the usefulness of the variable overhead price and usage variances.

(f) Compute the fixed overhead spending and volume variances. Interpret the fixed overhead spending and volume variances.

(g) Assume the purchasing agent for the Port Pirie plant purchased a lower-quality raw material from a new supplier. Would you recommend that the Port Pirie plant continue to use this cheaper raw material? If so, what standards would 7 need revision to reflect the decision to continue with the cheaper/lower-quality raw material? The quality of the finished waffle irons remains unaffected even if the Port Pirie plant uses the new supplier.

Product cost Direct materials Direct labour Variable overhead Fixed overhead Standard cost per unit Standard rate per unit 3.0 kilograms @ $4.00 per kilogram 0.8 hours @ $12.50 per hour 0.8 hours @ $6.00 per hour 0.8 hours @ $3.00 per hour Cost per unit $12.00 10.00 4.80 2.40 $29.20