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2. Variance Analysis

Nail_It company is a manufacturer of a custom engraved hammers. For the year 2021, the weekly budget was as follows.

• Sales revenue $64,000: 2,000 hammers price $32
• Variable costs:
  • Direct materials $10,000: 2,000 hammers 1 lbs per hammer price $5/lb
  • Direct labour $50,000: 2,000 hammers 5 hour per hammer rate $5/hour
  • no variable overhead
• Fixed costs: $3,000
• Profit: $1,000

The actual performance of the week was as follows.

• Sales revenue $70,400: 2,200 hammers price $32
• Variable costs:
  • Direct materials $13,200: 2,200 hammers 1 lbs per hammer price $6/lb
  • Direct labour $46,200: 2,200 hammers 3 hour per hammer rate $7/hour
  • no variable overhead
• Fixed costs: $8,000
• Profit: $8,000

Required:

1) Compute the following variances

a) Spending and Volume Variances of Materials

b) Spending and Volume Variances of Labour

c) Spending and Volume Variances of Fixed Overhead

d) Materials Quantity Variance

e) Materials Price Variance

f) Labour Efficiency Variance

g) Labour Rate Variance

2) Nail_It company hired an experienced engineer and asked her to re-organize the production process. How could hiring an experienced engineer and their new production process explain the variances? Please comment on individual components of variances, their relations to other variances, and overall impact on profitability.

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