1. Monoclean Company manufactures a single product, Glamour. The standard cost specification sheet shows the following standards for one unit of Glamour:

8 kg of material M @ $6.5 per kg $52

4 hours of direct labour @ $7 per hour $28

Fixed Overhead – $6 per direct labour hour $24

Variable Overhead – $3 per direct labour hour $12

The fixed overhead allocation rate is based on normal monthly capacity of 1,350 direct labour hours. Fixed overhead and production are expected to be spread evenly throughout the year.

A total of 420 Glamours were produced during July.

Actual costs incurred during July were:

3,200 kg of material M were purchased @ $7.50 per kg

2,000 kg of material M were used.

1,550 direct labour hours were worked at an average wage rate of $9 per hour

Actual overhead costs incurred:

Fixed $7,500 Variable $4,200

Required:

a) Compute the following variances:

Direct material price variance

Direct material quantity variance

Direct labour rate variance

Direct labour efficiency variance

Variable overhead spending variance

Fixed overhead budget variance

b) The company’s production manager stated that ‘Favourable variances are good news and therefore, require no investigation’. Do you agree? Explain your position.