Portfolio 5 Due Monday 17 November
Blair Ltd produces a single product – Product A. It uses a standard variable costing system for budgeting, planning and control. All finished goods stock is valued at standard variable for internal reporting purposes.
Budget for September 2008
The company budgeted to produce 5,800 units of Product A in September 2008. 600 of these were intended to facilitate a planned increase in finished goods stock levels. The budgeted selling price per unit was €102. Budgeted variable production costs for September 2008 were as follows:
Direct Material Cost 150,800
Direct Labour Cost 174,000
Variable Overheads 69,600
The standard quantity of material required per unit of Product A is 4kgs. Material is purchased as required for processing on a just-in-time basis. Each unit of Product A requires 2 standard hours of direct labour. The standard cost for variable overhead is calculated on the basis of euros per direct labour hour. Budgeted fixed production overheads for the financial year were €1,560,000 and these are expected to be incurred evenly throughout the year. Similarly it is expected that annual budgeted marketing and administration of €324,000 would be incurred evenly throughout the year.
Actual Production and Sales for September 2008
The company actually sold 5,400 units thus generating sales revenue of €561,600.
The following variable costs were incurred:
Direct Material Cost 179,520
Direct Labour Cost 186,000
Variable Overheads 76,880
The actual purchases cost per kg of material was €0.30 in excess of the standard. During September 300 kgs of material were damaged at the start of the production process and were rendered unusable. The actual average wage rate for September was €15.50 per hour. Fixed production overheads of €144,360 were incurred during September. The company also incurred fixed marketing and administration costs of €32,160.
(a) Prepare a detailed variance analysis statement, reconciling the actual operating profit with the budgeted operating profit for September 2008. Present all relevant variances in as much detail as possible.
(b) Prepare a commentary on the variance analysis for presentation to management in which you highlight key areas for concern.
(c) What if the question was slightly different and the €443,400 costs incurred in September related to the production of 6,200 units of which only 5,400 were sold?
Prepare a detailed variance analysis statement if those circumstances applied.
Management of Freedom Ltd, a small manufacturing company who produce a single product, are currently reviewing their management accounting systems. They wish to explore alternatives to the costing approach adopted in their monthly management accounts and are also concerned about the usefulness of budgets for the organisation. There is little competition in the sector in which Freedom Ltd operate
Current Costing System
The company currently uses an absorption costing system and reports actual costs for all line items each month. The budgeted volume of 168,000 units is used as the denominator activity level for calculating the overhead absorption rate currently employed by the company. It is also used in determining the fixed overhead per unit included in the standard costing information presented below
€ per unit € per unit
Selling price 150
Standard profit per unit 66
Various Costing Approaches
To assist management with their review the company accountant has prepared management accounts for October 2012 using three different approaches; standard absorption costing, standard variable costing and the absorption costing system currently employed whereby accounts are based on actual costs incurred.
A sales volume of 10,000 units was achieved during the month of October. 20,000 units of finished goods were in stock at the start of October and a further 8,000 units were produced during this month. The income statements prepared by the accountant under each of the three approaches are presented below:
Income statements for the month ending 31 October 2012
Cost of sales
Fixed S&D expend
* These fixed production costs include any under or over absorption of overheads
(a) Reconcile the standard variable costing profit with the standard absorption costing profit providing a clear explanation for any reconciling item(s) identified.
(b) Reconcile the standard absorption costing profit with the profit based on actual cost providing a clear explanation for any reconciling item(s) identified.
(c) Prepare a calculation which demonstrates how the fixed overhead volume variance of €216000 reported under Standard Absorption Costing has been arrived at.
(d) In the context of preparing monthly management accounts discuss the merits of using
(i) absorption costing;
(ii) variable costing
(e) Discuss whether or not, given its particular circumstances, Freedom Ltd would be likely to benefit from the introduction of an Activity Based Costing system.
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