The Variance Investigation Decision

First, determine actual output and standard quantities for actual output. Actual output = 1,100 units. Standard quantities for actual output:

• Direct materials: 3 kg/unit * 1,100 = 3,300 kg
• Direct labour: 2 hours/unit * 1,100 = 2,200 hours
• Variable overhead: 2 hours/unit * 1,100 = 2,200 hours
• Fixed overhead: 2 hours/unit * 1,100 = 2,200 hours

Direct materials variances:

• Price variance = (Standard price - Actual price) * Actual quantity purchased. Actual price = £14,700 / 3,500 kg = £4.20 per kg. Standard price = £4.00. Price variance = (£4.00 - £4.20) * 3,500 = -£700 (Adverse).
• Usage variance = (Standard quantity - Actual quantity) * Standard price = (3,300 - 3,500) * £4 = -£800 (Adverse).

Direct labour variances:

• Rate variance = (Standard rate - Actual rate) * Actual hours. Actual rate = £22,575 / 2,150 = £10.50 per hour. Standard rate = £10.00. Rate variance = (£10.00 - £10.50) * 2,150 = -£1,075 (Adverse).
• Efficiency variance = (Standard hours - Actual hours) * Standard rate = (2,200 - 2,150) * £10 = £500 (Favourable).

Variable overhead variances:

• Expenditure variance = (Standard variable overhead rate * Actual hours) - Actual variable overhead = (2,150 * £3) - £6,800 = £6,450 - £6,800 = -£350 (Adverse). Alternatively, (Standard rate - Actual rate) * Actual hours, where actual rate = £6,800/2,150 = £3.1628, so (£3 - £3.1628)*2150 = -£350.
• Efficiency variance = (Standard hours - Actual hours) * Standard rate = (2,200 - 2,150) * £3 = £150 (Favourable).

Fixed overhead variances:

• Expenditure variance = Budgeted fixed overhead - Actual fixed overhead. Budgeted fixed overhead = 1,000 units * 2 hours * £5 = £10,000. Actual = £11,200. Variance = £10,000 - £11,200 = -£1,200 (Adverse).
• Volume variance = (Standard hours for actual output - Budgeted hours) * Standard fixed overhead rate = (2,200 - 2,000) * £5 = £1,000 (Favourable). Alternatively, (Actual output - Budgeted output) * Standard fixed overhead per unit = (1,100 - 1,000) * £10 = £1,000 Favourable.

Summary:

• Materials price: £700 Adverse
• Materials usage: £800 Adverse
• Labour rate: £1,075 Adverse
• Labour efficiency: £500 Favourable
• Variable overhead expenditure: £350 Adverse
• Variable overhead efficiency: £150 Favourable
• Fixed overhead expenditure: £1,200 Adverse
• Fixed overhead volume: £1,000 Favourable

The policy: investigate if variance is greater than 5% of the standard cost for that cost element and if adverse. We need to compute the standard cost for each element for actual output (or budgeted? The policy says 'standard cost for that cost element' – likely the standard cost allowed for actual production). Let's compute the standard cost allowed for actual output for each element:

• Direct materials: 3,300 kg * £4 = £13,200
• Direct labour: 2,200 hours * £10 = £22,000
• Variable overhead: 2,200 hours * £3 = £6,600
• Fixed overhead: budgeted £10,000? Or standard fixed overhead for actual output? The policy says 'standard cost for that cost element' – for fixed overhead, the standard cost is the budgeted fixed overhead? Actually, fixed overhead is a period cost; the standard cost per unit is £10, so for actual output standard fixed overhead = 1,100 * £10 = £11,000. But the expenditure variance compares actual to budget, not to standard. The policy might be applied to the total variance for each element. We need to interpret. Typically, investigation decisions are based on the size of the variance relative to the standard cost. For each cost element, we can compute the total variance (sum of relevant variances) and compare to the standard cost allowed. Alternatively, we can assess each variance individually. The policy says 'variances' plural, so likely each variance separately. But it says 'greater than 5% of the standard cost for that cost element'. So for each variance, we compare its absolute value to 5% of the standard cost for that element (for actual output).

Let's compute 5% thresholds:

• Materials: 5% of £13,200 = £660
• Labour: 5% of £22,000 = £1,100
• Variable overhead: 5% of £6,600 = £330
• Fixed overhead: 5% of £11,000 = £550 (if using standard fixed overhead for actual output) or 5% of £10,000 = £500 (if using budget). We'll use standard cost for actual output: £11,000, so threshold £550.

Now evaluate each variance:

• Materials price variance: £700 Adverse. £700 > £660, so investigate.
• Materials usage variance: £800 Adverse. £800 > £660, so investigate.
• Labour rate variance: £1,075 Adverse. £1,075 > £1,100? No, £1,075 is less than £1,100, so do not investigate (even though it's adverse). Wait, 5% of £22,000 = £1,100. £1,075 < £1,100, so not investigate.
• Labour efficiency variance: £500 Favourable. Policy only investigates adverse variances, so ignore.
• Variable overhead expenditure variance: £350 Adverse. £350 > £330, so investigate.
• Variable overhead efficiency variance: £150 Favourable. Ignore.
• Fixed overhead expenditure variance: £1,200 Adverse. £1,200 > £550, so investigate.
• Fixed overhead volume variance: £1,000 Favourable. Ignore.

Thus, variances to investigate: materials price, materials usage, variable overhead expenditure, and fixed overhead expenditure.

Note: The labour rate variance is close to the threshold but does not exceed it. However, the policy says 'greater than 5%', so strictly not investigated. But management might still consider it if there are concerns. Also, the fixed overhead volume variance is favourable, so not investigated per policy. The decision should also consider whether the variances are interrelated; for example, the adverse materials price variance might be due to purchasing higher quality materials, which could lead to favourable usage variance, but here usage is also adverse, so that's not the case. The investigation should focus on the significant adverse variances.