You are required to conduct a detailed analysis of all the prime cost and overhead variances. You must create a fictitious company (and a fictitious cost object) which has at least three direct material categories; at least two direct labor categories and both variable and fixed overheads. Please make sure you clearly mention the standard and the actual quantity and price of all the inputs. You’re encouraged to use diagrams and flowcharts to illustrate your analysis.

In total, you’ll be analyzing 6 direct material variances (both price and efficiency variance for the three types of direct material – 3 × 2 = 6), 4 direct labor variances (both price and efficiency variance for the two types of direct labor – 2 × 2 = 4), 2 variable overhead variances (spending and efficiency variance) and 2 fixed cost variances (spending and volume variance).

You MUST make sure that any 4 out of the 6 direct material variances are unfavorable and any 1 out of 4 direct labor variances are favorable. In the end you must prepare a short report (maximum 1,000 words) of your analysis, identifying possible reasons for favorable and unfavorable variances. You’re also required to record the necessary journal entries to close all the variances.