It is now some time since the original operating budgets for the beach towel line were prepared. As part of the ongoing budgeting process, you have been regularly comparing the budgeted results to the actual results. During the first half of the year, you did not identify any material variances. However, during the second half of the year you notice a favourable material cost variance with the actual material cost per unit being 17% less than the budgeted amount. Upon further investigation, you identify that the reason for this variance is that the Production Manager has sourced lower quality fringing at a greatly reduced cost. In addition to the favourable material cost variance you also identify the following unfavourable variances in the second half of the year:
- an unfavourable sales variance with the actual number of units sold being 20% less than the budgeted number
- an unfavourable labour cost variance with the actual labour cost per unit being 23% higher than the budgeted amount Provide a possible reason for each of the unfavourable variances listed above. Your answer should be specific and relate to the information provided in the case study.