CASE: The missing Moscow Mule

BL Manufacturing Inc. makes copper mugs. The company has the following standards:

Direct materials (clay).............................. 1.3 kg per bottle, at a cost of $0.40 per kg

Direct labour............................................. 1/5 hour per bottle, at a cost of $14.80 per hour

Static budget variable overhead............... $70,500

Static budget fixed overhead..................... $30,500

Static budget direct labour hours.............. 10,000

Static budget number of bottles.................. 52,000

BL Manufacturing Inc. allocates manufacturing overhead to production based on standard direct labour hours. Last month the company reported the following actual results for the production of 69,000 bottles:

Direct materials.......................................... 1.5 kg per bottle, at a cost of $0.70 per kg

Direct labour............................................. 14 hour per bottle, at a cost of $12.90 per hour

Actual variable overhead........................... $104,600

Actual fixed overhead.............................. $28,700

Refer to the above data to calculate and interpret direct labour variances and specifically:

1. Calculate the overhead flexible budget variance. What does this tell management? 2. Calculate the production volume variance. What does this tell management?