QUESTION IV Variance Analysis (8 Marks)

The Litton Company has established standards as follows:

Direct materials: 3 kg @ $4/kg = $12 per unit

Direct labour: 2 hours @ $8 per hour = $16 per unit

Variable mfg overhead: 2 hours @ $5 per hour = $10 per unit

Actual production figures for the past year are given below. The company records the materials price variance when materials are purchased.

Units produced 600

Direct material used 2,000

Direct material purchased (3,000 kg) $11,400

Direct labour cost (1,100 hrs) $9,240

Variable MOH cost incurrecc $5,720

The company applies variable manufacturing overhead to products on the basis of direct labour hours.

REQUIRED:

1. Compute and name the relevant variances for direct material, direct labour, and variable manufacturing overhead.

2. Which two variances (be specific) would you bring to the attention of management? Explain the impact on profitability. What could have possibly caused these variances?