You are the cost accountant at a manufacturer of porcelain coffee mugs. The materials used for the bowls are inexpensive, but the process is labour intensive. The supervisor decided to use cheaper labour this period to see whether costs could be reduced. You have been requested to prepare a report for your supervisor reflecting on the results for February. She has previously set the following standards.

Cost per unit
Direct materials	3.5 kg @ $2.40	$8.4
Direct labour	5.5 hours @ $14	$77
Factory overhead:
Variable	$3 per direct labour hour	$16.50
Fixed	$25 per unit	$25.00

Variable overhead is allocated by labour hours and fixed overhead is allocated by unit. Estimated production per month is 8 000 units (44000 direct labour hours) with fixed overhead expenditure budgeted at $200,000.

Records for February, based on production of 7 800 units, indicated the following:

Direct materials purchased	28 000 kg @ $2.80	$78,400
Direct materials used	24500 kg
Direct labour	40500 hours @ $14.85	$601,425
Variable overhead		$130,700
Fixed overhead		$205,000

Required

1. Prepare a flexible budget to enable assessment of the strategy undertaken by management.

2. Discuss the variances and recommend whether any of them should be investigated further.

3. Calculate the flexible-budget variances for raw materials and labour and comment on the results.