Door Dezigns limited manufactures high quality oak doors from reclaimed wood. The company is based in Wicklow and was founded in 1999. Previously the company experienced strong growth and made significant profits but this changed during the recent recession when the company almost went out of business. In the past two years, Door Dezigns limited has seen an increase in its business and based on the company’s prior experience, the directors are keen to ensure that costs are tightly controlled. The company operates a standard absorption costing system. The following details relating to the most recent financial period are available:
|Standard cost card for one oak door: Direct materials||€|
|– reclaimed oak: 1.75 square metres @ €22 per square metre||38.50|
|– Oak dowels:16 @ €0.25 each||4.00|
|Direct labour : 0.75 hours @ €20 per hour||15.00|
|Variable production overhead: 0.75 hour @ €4.60 per direct labour hour||3.45|
|fixed production overhead: @ €5.10 per door||5.10|
|The company budgeted to produce 10,000 oak doors during the period.|
|Actual results from production of 9,500 oak doors:||€|
|Direct materials – reclaimed oak (17,100 square metres)||375,345|
|– Oak dowels (159,600 dowels)||41,496|
|Direct labour (6,650 hours)||139,650|
using the information provided above:
(a) Prepare a cost statement showing the original budget, flexed budget and actual results.
(b) Calculate all variances in as much detail as the information permits.
(c) Outline TWO possible reasons to explain the direct labour variances that you have calculated at (b) above