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PPM 4-3

Question 01 (Mobi Co)
Question 02 (Scew Co)
Question 03 (ZBB)
Question 04 (Brown Co)
Question 05 (DH Co)
Question 06 (Grill Co)
Question 07 (Cakes and Bakes)
Question 08 (BB Ltd)
Question 09 (Olive)
Question 10 (Furnico)
Question 11 (Candy Co)
Question 12 (Alga Co)
Question 13 (Cube Co)
Question 14 (Soap Stories)
Question 15 (Trenton School)
Question 16 (Vanish Co)
Question 17 (Roomco)
Question 18 (Su Co)
Question 19 (DHS Co)
Question 20 (ANF Co)
Question 01 (Mobi Co)

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1 / 3

1. MOBI CO

Mobi Co produces microphones for mobile phones and operates a standard costing system. Before production commenced, the standard labour time per batch for its latest microphone was estimated to be 200 hours. The standard labour cost per hour is $12 and resource allocation and cost data were therefore initially prepared on this basis.

Production of the microphone started in July and the number of batches assembled and sold each month was as follows:

Month                                    No of batches assembled and sold

July                                                                       1

August                                                                 1

September                                                          2

October                                                               4

November                                                           8

The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a learning effect of 88% was observed, although this finished at the end of October. The learning formula is shown on the formula sheet and at the 88% learning rate the value of b is –0.1844245.

Mobi Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new microphone in the first five months have been disappointing. The sales manager has blamed the production department for getting the labour cost so wrong, as this, in turn, caused the price to be too high. The production manager has disclaimed all responsibility, saying that, ‘as usual, the managing director prepared the budgets alone and didn’t consult me and, had he bothered to do so, I would have told him that a learning curve was expected.’

Required:

A. Calculate the actual total monthly labour costs for producing the microphones for each of the five months from July to November.

  1. Every time output doubles, the average time per batch is 88% of what it was previously. The learning curve effect ends in October and does not apply in November, when the average time per unit is the same as the time required to make the eighth batch in October.
Month Cumulative batches Average time per batch

Hours

Total time

Hours

Incremental time in the month

Hours

Labour cost per month at $12 per hour

$

July 1 200.00 200.00 200.00 2,400
August 2 176.00 352.00 152.00 1,824
September 4 154.88 619.52 267.52 3,210
October 8 136.294 1,090.35 470.83 5,650

 

Average time to produce first 7 batches = 200 × 7 –0.1844245 = 200 × 1/1.4317157 = 139.6925 hours

Total time for first 7 batches = 7 × 139.6925 = 977.85 hours

Average time to produce first 8 batches = 200 × 8 –0.1844245 = 200 × 1/1.4674115 =

136.2944 hours

Total time for first 8 batches = 8 × 136.2944 = 1,090.35 hours

Time to make the 8th batch = 1,090.35 – 977.85 = 112.50 hours

Total labour cost in November = 8 batches × 112.50 per batch × $12 per hour = $10,800.

2 / 3

B. Discuss the implications of the learning effect coming to an end for Mobi Co, with regard to costing, budgeting and production.

3 / 3

C. Discuss the potential advantages and disadvantages of involving senior staff at Mobi Co in the budget-setting process, rather than the managing director simply imposing budgets on them.

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Question 02 (Scew Co)

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1 / 3

2. SCEW CO

Scew Co is a multinational consumer goods company. Traditionally, the company has used a fixed annual budgeting process in which it sets quarterly sales revenue targets for each of its product lines. Historically, however, if a product line fails to reach its sales revenue target in any of the first three quarters, the company’s sales director (SD) and finance director (FD) simply go back and reduce the sales revenue targets for the quarter just ended, to make it look like the target was reached. They then increase the target for the final quarter to include any shortfall in sales from earlier quarters.

During the last financial year ended 31 August 20X6, this practice meant that managers had to heavily discount many of their product lines in the final quarter in order to boost sales volumes and meet the increased targets. Even with the discounts, however, they still did not quite reach the targets. On the basis of the sales targets set at the beginning of that year, the company had also invested $6m in a new production line in January 20X6. However, to date, this new production line still has not been used. As a result of both these factors, Scew Co saw a dramatic fall in return on investment from 16% to 8% in the year.

Consequently, the managing director (MD), the FD and the SD have all been dismissed. Two key members of the accounts department are also on sick leave due to stress and are not expected to return for some weeks. A new MD, who is inexperienced in this industry, has been appointed and is in the process of recruiting a new SD and a new FD. He has said:

‘These mistakes could have been largely avoided if the company had been using rolling budgets, instead of manipulating fixed budgets. From now on, we will be using rolling budgets, updating our budgets on a quarterly basis, with immediate effect.’

The original fixed budget for the year ended 31 August 20X7, for which the first quarter (Q1) has just ended, is shown below:

Budget Y/E 31 August 20X7 Q1 Q2 Q3 Q4 Total
  $000 $000 $000 $000 $000
Revenue 13,425 13,694 13,967 14,247 55,333
Cost of sales (8,055) (8,216) (8,380) (8,548) (33,199)
Gross profit 5,370 5,478 5,587 5,699 22,134
Distribution costs (671) (685) (698) (712) (2,766)
Administration costs (2,000) (2,000) (2,000) (2,000) (8,000)
Operating profit 2,699 2,793 2,889 2,987 11,368

The budget was based on the following assumptions:

(1) Sales volumes would grow by a fixed compound percentage each quarter.

(2) Gross profit margin would remain stable each quarter.

(3) Distribution costs would remain a fixed percentage of revenue each quarter.

(4) Administration costs would be fixed each quarter.

The actual results for the first quarter (Q1) have just been produced and are as follows:

Actual results                                                                       Q1

$000

Revenue                                                                            14,096

Cost of sales                                                                     (8,740)

––––––

Gross profit                                                                       5,356

Distribution costs                                                             (705)

Administration costs                                                      (2,020)

––––––

Operating profit                                                               2,631

––––––

The new MD believes that the difference between the actual and the budgeted sales figures for Q1 is a result of incorrect forecasting of prices, however, he is confident that the four assumptions the fixed budget was based on were correct and that the rolling budget should still be prepared using these assumptions.

Required:

A. Prepare Scew Co’s rolling budget for the next four quarters.

  1. Workings

From budgeted figures: need to work out what the compound growth rate is and the distribution costs as a percentage of revenue.

Compound sales growth: $13,694/13,425 or $13,967/13,694 = 2% Distribution costs:

$671/$13,425 = 5%

From actual figures: GPM = $5,356/14,096 = 38%

Distribution costs: $705/14,096 = still 5%.

Starting point for revenue now $14,096 but compound growth rate still 2%.

Rolling budget for the 12 months ending 30 November 20X7

  Q2 Q3 Q4 Q1
  $000 $000 $000 $000
Revenue 14,378 14,666 14,959 15,258
Cost of sales (8,914) (9,093) (9,275) (9,460)
Gross profit 5,464 5,573 5,684 5,798
Distribution costs (719) (733) (748) (763)
Administration costs (2,020) (2,020) (2,020) (2,020)
Operating profit 2,725 2,820 2,916 3,015

2 / 3

B. Discuss the problems which have occurred at Scew Co due to the previous budgeting process and the improvements which might now be seen through the use of realistic rolling budgets.

3 / 3

C. Discuss the problems which may be encountered when Scew Co tries to implement the new budgeting system.

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Question 03 (ZBB)

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1 / 4

3. ZBB

Some commentators argue that: ‘With continuing pressure to control costs and maintain efficiency, the time has come for all public sector organisations to embrace zero-based budgeting. There is no longer a place for incremental budgeting in any organisation, particularly public sector ones, where zero-based budgeting is far more suitable anyway.’

Required:

A. Discuss the particular difficulties encountered when budgeting in public sector organisations compared with budgeting in private sector organisations, drawing comparisons between the two types of organisations.

2 / 4

B. Explain the terms ‘incremental budgeting’ and ‘zero-based budgeting’.

3 / 4

C. State the main stages involved in preparing zero-based budgets.

4 / 4

D. Discuss the view that ‘there is no longer a place for incremental budgeting in any organisation, particularly public sector ones,’ highlighting any drawbacks of zero-based budgeting that need to be considered.

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Question 04 (Brown Co)

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4. BROWN CO

Brown Co provides skilled labour to the building trade. They have recently been asked by a builder to bid for a kitchen fitting contract for a new development of 600 identical apartments. Brown Co has not worked for this builder before. Cost information for the new contract is as follows:

Labour for the contract is available. Brown Co expects that the first kitchen will take 24 man-hours to fit but thereafter the time taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning rate will stop and the time taken for the 200th kitchen will be the time taken for all the remaining kitchens. Labour costs $15 per hour.

Overheads are absorbed on a labour hour basis. Brown Co has collected overhead information for the last four months and this is shown below:

Hours worked                           Overhead cost $

Month 1                                    9,300                                         115,000

Month 2                                    9,200                                         113,600

Month 3                                    9,400                                         116,000

Month 4                                    9,600                                         116,800

Brown Co normally works around 120,000 labour hours in a year.

Brown Co uses the high low method to analyse overheads.

The learning curve equation is y = axb, where b = log r/log 2 = –0.074

Required:

A. Describe FIVE factors, other than the cost of labour and overheads mentioned above, that Brown Co should take into consideration in calculating its bid.

2 / 3

B. Calculate the total cost including all overheads for Brown Co that it can use as a basis of the bid for the new apartment contract.

Bid calculations for Brown Co to use as a basis for the apartment contract.

Cost Hours Rate per hour Total
      $
Labour 9,247 (W1) $15 138,705
Variable overhead 9,247 $8 (W2) 73,976
Fixed overhead 9,247 $4 (W2) 36,988
Total cost     249,669

 

Workings

(W1) Need to calculate the time for the 200th kitchen by taking the total time for the 199 kitchens from the total time for 200 kitchens.

For the 199 Kitchens

Using

y = axb                                      OR            y = axb

y = 24 × 199–0.074                                     y = (24 × 15) × 199–0.074

y = 16.22169061 hours                         y = 243.32536

Total time = 16.22169061 × 199         Total cost = $48,421.75

Total time = 3,228.12 hours

 

For the 200 Kitchens

y = axb                                     OR            y = axb

y = 24 × 200–0.074                                     y = (24 × 15) × 200–0.074

y = 16.21567465 hours                         Total cost = $48,647.02

Total time = 16.21567465 × 200         200th cost = $225.27

Total time = 3,243.13 hours

The 200th Kitchen took 3,243.13 – 3,228.12 = 15.01 hours

Total time is therefore:

For first 200                                                    3,243.13 hours

For next 400 (15.01 hours × 400)               6,004.00 hours

Total                                                                9,247.13 hours (9,247 hours)

(W2) The overheads need to be analysed between variable and fixed cost elements.

Taking the highest and lowest figures from the information given:

Hours                 Cost $

Highest                     9,600               116,800

Lowest                      9,200               113,600

Difference                 400                   3,200

Variable cost per hours is $3,200/400 hours = $8 per hour

Total cost = variable cost + fixed cost

116,800 = 9,600 × 8 + fixed cost

Fixed cost = $40,000 per month

Annual fixed cost = $40,000 × 12 = $480,000

Fixed absorption rate is $480,000/120,000 hours = $4 per hour

3 / 3

C. If the second kitchen alone is expected to take 21.6 man-hours to fit demonstrate how the learning rate of 95% has been calculated.

A table is useful to show how the learning rate has been calculated.

Number of Kitchens Time for Kitchen

(hours)

Cumulative time

(hours)

Average time

(hours)

1 24.00 24.00 24.00
2 21.60 45.60 22.80

 

The learning rate is calculated by measuring the reduction in the average time per kitchen as cumulative production doubles (in this case from 1 to 2).

The learning rate is therefore 22.80/24.00 or 95%.

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Question 05 (DH Co)

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5. DH CO

DH Co manufactures security cards that restrict access to government-owned buildings around the world.

The standard cost for the plastic that goes into making a card is $4 per kg and each card uses 40 g of plastic after an allowance for waste. In November 100,000 cards were produced and sold by DH Co and this was well above the budgeted sales of 60,000 cards.

The actual cost of the plastic was $5.25 per kg and the production manager (who is responsible for all buying and production issues) was asked to explain the increase. They said ‘World oil price increases pushed up plastic prices by 20% compared to our budget and I also decided to use a different supplier who promised better quality and increased reliability for a slightly higher price. I know we have overspent but not all the increase in plastic prices is my fault. The actual usage of plastic per card was 35 g per card and again the production manager had an explanation. They said, ‘The world-wide standard size for security cards increased by 5% due to a change in the card reader technology; however, our new supplier provided much better quality of plastic, and this helped to cut down on the waste.’

DH Co operates a just-in-time (JIT) system and hence carries very little inventory.

Required:

A. Discuss the behavioural problems that can arise from using standard costs and ways to prevent them.

2 / 3

B. Analyse the above total variances into component parts for planning and operational variances in as much detail as the information allows.

Planning price variance

  $
Original standard price per kg 4.00
Revised standard price per kg 4.80
Planning price variance per kg 0.80 (A)
Quantity used = 100,000 ´ 0.035 3,500 kg
Planning price variance in $ $2,800 (A)

 Planning usage variance

  kg
Original standard: 100,000 units should use (´ 0.04) 4,000
Revised standard: 100,000 units should use (´ 0.042) 4,200
Planning usage variance in kg 200 (A)
Original standard price per kg $4
Planning usage variance in $ $800 (A)

 Operational price variance

  $
Actual price of actual materials (3,500 kg) 18,375
Revised standard price of actual materials ($4.80 ´ 3,500 kg) 16,800
Operational price variance 1,575 (A)

Operational usage variance

Actual quantity should have been 4,200 kg
but was 3,500 kg
Operational usage variance in kg 700 kg (F)
´ original standard cost per kg ´ $4
Operational usage variance in $ $2,800 (F)

 

 

 

Check:

  $ $
Actual cost of materials: 3,500 kg ´ $5.25   18,375
Original standard cost: 100,000 units ´ 40 g ´ $4 per kg   16,000
Total materials cost variance   2,375 (A)
Variances:    
Price planning 2,800 (A)  
Usage planning 800 (A)  
Price operational 1,575 (A)  
Usage operational 2,800 (F)  
    2,375 (A)

3 / 3

C. Assess the performance of the production manager.

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Question 06 (Grill Co)

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6. GRILL CO

Grill Co owns a number of restaurants. It is a well-established company, and its restaurants have gained a favourable reputation for the quality of their meals.

Grill Co’s restaurants are all set in rural locations, where there is limited competition, and this enabled them to develop a loyal customer base. Restaurants design their own menus and décor to fit with the requirements of their local market.

Grill Co has been consistently profitable, however as is the case across the restaurant industry, profit margins are quite low and there is still a constant need for Grill Co to monitor costs.

One of Grill Co’s restaurants is located in the small town of Caprew. Caprew has recently been the location for the filming of a popular television series and visitor numbers to the town have increased significantly as a result. Grill Co’s restaurant in Caprew has noticed a similar increase in customer numbers.

At the start of the current month a new restaurant opened in Caprew. The manager of Grill Co’s restaurant in Caprew has expressed concerns about the impact this new competitor will have on their ability to achieve profit targets for the rest of the year.

Budgets for all of Grill Co’s restaurants are prepared by the head office. At the start of each year, restaurant managers are given an annual budget, which is split into months. At the end of each month, the manager receives a statement comparing actual monthly performance against budget.

The statement for the Caprew restaurant for the most recent completed month is as follows:

  Actual Budget Variance
Number of customers 1,800 1,500  
  $ $ $
Revenue 87,300 75,000 12,300 F
Costs:      
Food and drink 26,100 22,500 3,600 A
Staff wages 38,250 31,500 6,750 A
Heat, light and power 8,100 7,500 600 A
Rent, rates and other overheads 12,600 12,000 600 A
Profit 2,250 1,500 750 F

Notes:

  • Rent, rates and other overheads are apportioned to its restaurants by Grill Co’s head office, based on a fixed annual charge.
  • All other budgeted costs are treated as variable costs, based on the expected number of customers.

Grill Co currently adopts an incremental approach to budgeting, with the annual budget figures for each year being based on the previous year’s figures. However, a new finance director has recently joined the company, and he has questioned whether this is suitable for all Grill Co’s restaurants.

The new finance director has also suggested that the company should adopt a more participative approach to budgeting.

Required:

A. i) Prepare a flexed budget for the Caprew restaurant.

2 / 4

ii) With reference to your answer from part (i), explain the main weaknesses in the current monthly budget statements issued to the restaurants as a basis for managing performance.

3 / 4

B. Discuss whether an incremental approach to budgeting is appropriate for Grill Co.

4 / 4

C. Define a participative approach to budgeting and explain the potential advantages and disadvantages of introducing this approach at Grill Co.

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Question 07 (Cakes and Bakes)

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7. CAKES AND BAKES

Cakes and Bakes (CB) makes cakes, which are sold directly to the public. The new production manager (a celebrity chef) has argued that the business should use only organic ingredients in its cake production. Organic ingredients are more expensive but should produce a product with an improved flavour and give health benefits for the customers. It was hoped that this would stimulate demand and enable an immediate price increase for the cakes.

CB operates a responsibility-based standard costing system which allocates variances to specific individuals. The individual managers are paid a bonus only when net favourable variances are allocated to them.

The new organic cake production approach was adopted at the start of March 20X9, following a decision by the new production manager. No change was made at that time to the standard costs card. The variance reports for February and March are shown below (Fav = Favourable and Adv = Adverse).

Manager responsible Allocated variances February

variance

$

March

variance

$

Production manager Material price (total for all ingredients) 25 Fav 2,100 Adv
  Material mix 0 600 Adv
  Material yield 20 Fav 400 Fav
Sales manager Sales price 40 Adv 7,000 Fav
  Sales contribution volume 35 Adv 3,000 Fav

 The production manager is upset that they seem to have lost all hope of a bonus under the new system. The sales manager thinks the new organic cakes are excellent and is very pleased with the progress made.

CB operates a JIT inventory system and holds virtually no inventory.

Required:

A. Assess the performance of the production manager and the sales manager and indicate whether the current bonus scheme is fair to those concerned.

2 / 3

In April 20X9 the following data applied:

Standard cost card for one cake (not adjusted for the organic ingredient change)

Ingredients Kg $
Flour 0.10 0.12 per kg
Eggs 0.10 0.70 per kg
Butter 0.10 1.70 per kg
Sugar 0.10 0.50 per kg
Total input 0.40  
Normal loss (10%) (0.04)  
Standard weight of a cake 0.36  

The budget for production and sales in April was 50,000 cakes. Actual production and sales was 60,000 cakes in the month, during which the following occurred:

Ingredients used Kg $
Flour 5,700 $741
Eggs 6,600 $5,610
Butter 6,600 $11,880
Sugar 4,578 $2,747
Total input 23,478 $20,978
Actual loss (1,878)  
Actual output of cake mixture 21,600  

All cakes produced must weigh 0.36 kg, as this is what is advertised.

B. Calculate the material price, mix and yield variances for April. You are not required to make any comment on the performance of the managers.

Material price variances

  $
5,700 kg of flour should have cost (´ $0.12) 684
but did cost 741
Material price variance 57 (A)
   
6,600 kg of eggs should have cost (´ $0.70) 4,620
but did cost 5,610
Material price variance 990 (A)
   
6,600 kg of butter should have cost (´ $1.70) 11,220
but did cost 11,880
Material price variance 660 (A)
   
4,578 kg of sugar should have cost (´ $0.50) 2,289
but did cost 2,747
Material price variance 458 (A)
   
Total material price variance 2,165 (A)

  

Material mix variances

Total quantity used = 5,700 + 6,600 + 6,600 + 4,578 = 23,478 kg

Standard mix of actual use of each ingredient is in equal proportions = 23,478/4 = 5,869.5 kg

  Actual quantity

Actual mix

Actual quantity

Standard mix

Variance Standard cost

per kg

Variance
  Kg Kg Kg $ $
Flour 5,700 5869.5 169.5 (F) 0.12 20.34 (F)
Eggs 6,600 5869.5 730.5 (A) 0.70 511.35 (A)
Butter 6,600 5869.5 730.5 (A) 1.70 1,241.85 (A)
Sugar 4,578 5869.5 1,291.5 (F) 0.50 645.75 (F)
  23,478 23,478     1,087.11 (A)

 Material yield variance

Standard cost of a cake

    $
Flour 0.1 kg ´ $0.12 0.012
Eggs 0.1 kg ´ $0.70 0.070
Butter 0.1 kg ´ $1.70 0.170
Sugar 0.1 kg ´ $0.50 0.050
    0.302

 

  Cakes
The actual quantity of inputs are expected to yield (23,478/0.4) 58,695
Actual output 60,000
Yield variance in cakes 1,305 (F)
´ standard cost per cake ($0.302) $394.11 (F)

 Alternative method

  Standard quantity

Standard mix

Actual quantity

Standard mix

Variance Standard cost

per kg

Variance
  Kg Kg Kg $ $
Flour 6,000 5869.5 130.5 0.12 15.66
Eggs 6,000 5869.5 130.5 0.70 91.35
Butter 6,000 5869.5 130.5 1.70 221.85
Sugar 6,000 5869.5 130.5 0.50 65.25
  24,000 23,478     394.11 (F)

3 / 3

With the benefit of hindsight, the management of CB realizes that a more realistic standard cost for current conditions would be $0.40 per cake. The planned standard cost is unrealistically low.

C. Calculate the total cost planning and operational variances for April. Briefly comment on each variance.

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Question 08 (BB Ltd)

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8. BB LTD

BB Ltd manufactures and markets a range of electronic office equipment. The company currently has a turnover of $40 million per annum. The company has a functional structure and currently operates an incremental budgeting system. The company has a budget committee that is comprised entirely of members of the senior management team. No other personnel are involved in the budget-setting process.

Each member of the senior management team has enjoyed an annual bonus of between 10% and 20% of their annual salary for each of the past five years. The annual bonuses are calculated by comparing the actual costs attributed to a particular function with budgeted costs for that function during the twelve-month period ended 31 December in each year.

A new Finance Director, who previously held a senior management position in a ‘not for profit’ health organisation, has recently been appointed. Whilst employed by the health service organisation, the new Finance Director had been the manager responsible for the implementation of a zero-based budgeting system which proved highly successful.

Required:

A. Identify and discuss the factors to be considered when implementing a system of zero-based budgeting within BB Ltd. Include, as part of your discussion, a definition of the existing incremental budgeting system and a zero-based budgeting system.

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B. Identify and discuss the behavioural problems that the management of BB Ltd might encounter in implementing a system of zero-based budgeting, recommending how best to address such problems in order that they are overcome.

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C. Explain how the implementation of a zero-based budgeting system in BB Ltd may differ from the implementation of such a system in a ‘not for profit’ health organisation.

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Question 09 (Olive)

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9. OLIVE

Olive is a restaurant that is only open in the evenings, on six days of the week. It has eight restaurant and kitchen staff, each paid a wage of $8 per hour on the basis of hours actually worked. It also has a restaurant manager and a head chef, each of whom is paid a monthly salary of $4,300. Olive’s budget and actual figures for the month of May was as follows:

  Budget   Actual  
Number of meals 1,200   1,560  
  $ $ $ $
Revenue: Food 48,000   60,840  
                 Drinks 12,000   11,700  
    60,000   72,540
Variable costs:        
Staff wages (9,216)   (13,248)  
Food costs (6,000)   (7,180)  
Drink costs (2,400)   (5,280)  
Energy costs (3,387)   (3,500)  
    (21,003)   (29,208)
Contribution   38,997   43,332
Fixed costs:        
Manager’s and chef’s pay (8,600)   (8,600)  
Rent, rates and depreciation (4,500) (13,100) (4,500) (13,100)
Operating profit   25,897   30,232

 The budget above is based on the following assumptions:

  • The restaurant is only open six days a week and there are four weeks in a month. The average number of orders each day is 50 and demand is evenly spread across all the days in the month.
  • The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which costs $45 per meal. In addition to this, irrespective of which meal the customer orders, the average customer consumes four drinks each at $2.50 per drink. Therefore, the average spend per customer is either $45 or $55 including drinks, depending on the type of meal selected. The May budget is based on 50% of customers ordering Meal A and 50% of customers ordering Meal B.
  • Food costs represent 12.5% of revenue from food sales.
  • Drink costs represent 20% of revenue from drinks sales.
  • When the number of orders per day does not exceed 50, each member of hourly paid staff is required to work exactly six hours per day. For every incremental increase of five in the average number of orders per day, each member of staff has to work 0.5 hours of overtime for which they are paid at the increased rate of $12 per hour. You should assume that all costs for hourly paid staff are treated wholly as variable costs.
  • Energy costs are deemed to be related to the total number of hours worked by each of the hourly paid staff, and are absorbed at the rate of $2.94 per hour worked by each of the eight staff.

Required:

A. Prepare a flexed budget for the month of May, assuming that the standard mix of customers remains the same as budgeted.

2 / 3

B. After preparation of the flexed budget, you are informed that the following variances have arisen in relation to total food and drink sales:

Sales mix contribution variance                           $1,014 Adverse

Sales quantity contribution variance                  $11,700 Favourable

BRIEFLY describe the sales mix contribution variance and the sales quantity contribution variance. Identify why each of them has arisen in Olive’s case.

3 / 3

C. Olive’s owner told the restaurant manager to run a half-price drinks promotion at Olive for the month of May on all drinks. Actual results showed that customers ordered an average of six drinks each instead of the usual four but, because of the promotion, they only paid half of the usual cost for each drink. You have calculated the sales margin price variance for drink sales alone and found it to be a worrying $11,700 adverse. The restaurant manager is worried and concerned that this makes their performance for drink sales look very bad.

Briefly discuss TWO other variances that could be calculated for drinks sales or food sales in order to ensure that the assessment of the restaurant manager’s performance is fair.

These should be variances that COULD be calculated from the information provided above although no further calculations are required here.

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Question 10 (Furnico)

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10. FURNICO

Furnico manufactures and sells executive leather chairs. They are considering a new design of massaging chair to launch into the competitive market in which they operate.

They have carried out an investigation in the market and using a target costing system have targeted a competitive selling price of $120 for the chair. Furnico wants a margin on selling price of 20% (ignoring any overheads).

The frame and massage mechanism will be bought in for $51 per chair and Furnico will upholster it in leather and assemble it ready for despatch.

Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all leather is wasted in the upholstery process.

The upholstery and assembly process will be subject to a learning effect as the workers get used to the new design. Furnico estimates that the first chair will take two hours to prepare but this will be subject to a learning rate (LR) of 95%. The learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the time for all subsequent chairs. The cost of labour is $15 per hour.

The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is –0.074000581.

Required:

A. Calculate the average cost for the first 128 chairs made and identify any cost gap that may be present at that stage.

  1. The average cost of the first 128 chairs is as follows:

$

Frame and massage mechanism                                                                             51.00

Leather                                                      2 metres × $10/mtr × 100/80              25.00

Labour                                                       (W1)                                                          20.95

––––

Total                                                                                                                             96.95

––––

Target selling price is $120.

Target cost of the chair is therefore $120 × 80% = $96

The cost gap is $96.95 – $96.00 = $0.95 per chair

Workings

(W1) The cost of the labour can be calculated using learning curve principles. The formula can be used, or a tabular approach would also give the average cost of 128 chairs. Both methods are acceptable and shown here.

Tabulation:

Cumulative output (units) Average time per unit (hrs) Total time

(hrs)

Average cost per chair at $15 per hour
1

2

4

8

16

32

64

128

2

1.9

1.805

1.71475

1.6290125

1.54756188

1.47018378

1.39667459

 

 

 

 

 

 

 

178.77

 

 

 

 

 

 

 

20.95

 

Formula:

Y = axb

Y = 2 × 128–0.074000581

Y = 1.396674592

The average cost per chair is 1.396674592 × $15 = $20.95

2 / 3

B. Assuming that a cost gap for the chair exists suggest four ways in which it could be closed.

3 / 3

C. The production manager denies any claims that a cost gap exists and has stated that the cost of the 128th chair will be low enough to yield the required margin.

 

C. Calculate the cost of the 128th chair made and state whether the target cost is being achieved on the 128th chair.

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Question 11 (Candy Co)

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11. CANDY CO

Candy Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour. In November, Candy Co had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers were paid for their actual hours worked. The actual total labour cost for November was $136,800. The production manager at Candy Co has no input into the budgeting process.

At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut with immediate effect.

At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it takes time before the workers become used to working with the new ingredient mix, making the process 20% slower for at least the first month of the new operation.

The standard costing system is only updated once a year, in June, and no changes are ever made to the system outside of this.

Required:

A. Calculate the total labour rate and total labour efficiency variances for November, based on the standard cost provided above.

Labour variances

Standard cost per labour hour = $6.00 / 0.5 = $12.00

Labour rate variance

  $
12,000 hours of work should have cost (´ $12 per hr) 144,000
but did cost 136,800
Labour rate variance 7,200 (F)

 

Labour efficiency variance

20,500 batches should have taken (´ 0.5 hrs) 10,250 hrs
but did take 12,000 hrs
Efficiency variance in hours 1,750 hrs (A)
´ standard rate per hour ´ $12
Efficiency variance $21,000 (A)

2 / 3

B. Analyse the total labour rate and total labour efficiency variances into component parts for planning and operational variances in as much detail as the information allows.

  1. Planning and operational variances

Labour rate planning variance

  $
Standard rate 12.00
Revised rate ($12 ´ 0.95) 11.40
Variance 0.60 (F)
´ actual hours paid (12,000) ´ 12,000
Labour rate planning variance $7,200 (F)

 

 

Labour rate operational variance

  $
Revised cost of actual hours (12,000 ´ $12 ´ 95%) 136,800
Actual cost of actual hours 136,800
Labour rate operational variance $nil

 

Labour efficiency planning variance

Standard hours for actual production (20,500 ´ 0.5 hrs per batch) 10,250 hrs
Revised hours for actual production (20,500 batches ´ 0.5 hrs per batch ´ 1.2) 12,300 hrs
Variance 2,050 hrs (A)
´ original standard rate per hour ´ $12
Labour efficiency planning variance $24,600 (A)

 

Labour efficiency operational variance

20,500 batches should have taken (20,500 ´ 0.5 ´ 1.2) 12,300 hrs
but did take 12,000 hrs
Variance 300 hrs (F)
´ original standard rate per hour ´ $12
Labour efficiency operational variance $3,600 (F)

 

Alternative solution

The following solution, calculating the labour efficiency operational variance using the revised standard rate per hour, and the labour rate planning variance based on revised hours for actual production also scored full marks.

Note that while this approach does not reconcile to the labour rate and efficiency variances calculated in part (a), it does reconcile to the total labour variance ($13,800 adverse).

 

 

Labour rate planning variance

  $
Standard rate 12.00
Revised rate ($12 ´ 0.95) 11.40
Variance 0.60 (F)
´ revised hours for actual production (12,300) ´ 12,300
Labour rate planning variance $7,380 (F)

 

Labour rate operational variance

  $
Revised cost of actual hours (12,000 ´ $12 ´ 95%) 136,800
Actual cost of actual hours 136,800
Labour rate operational variance $nil

 

Labour efficiency planning variance

Standard hours for actual production (20,500 ´ 0.5 hrs per batch) 10,250 hrs
Revised hours for actual production (20,500 batches ´ 0.5 hrs per batch ´ 1.2) 12,300 hrs
Variance 2,050 hrs (A)
´ standard rate per hour ´ $12
Labour efficiency planning variance $24,600 (A)

 

Labour efficiency operational variance

20,500 batches should have taken (20,500 ´ 0.5 ´ 1.2) 12,300 hrs
but did take 12,000 hrs
Variance 300 hrs (F)
´ revised standard rate per hour ´ $11.40
Labour efficiency operational variance $3,420 (F)

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C. Assess the performance of the production manager for the month of November.

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Question 12 (Alga Co)

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12. ALGA CO

Alga Co a medium sized company, produces a single product in its one overseas factory. For control purposes, a standard costing system was recently introduced.

The standards set for the month of May were as follows:

Production and sales                                               16,000 units

Selling price (per unit)                                             $140

Materials:

Material 003                                                             6 kilos per unit at $12.25 per kilo

Material GL60                                                           3 kilos per unit at $3.20 per kilo

Labour                                                                        4.5 hours per unit at $8.40 per hour

Overheads (all fixed)                                               $86,400 per month.

(They are not absorbed into the product costs)

The actual data for the month of May is as follows:

Produced 15,400 units which were sold at $138.25 each.

Materials: Used 98,560 kilos of material 003 at a total cost of $1,256,640 and used 42,350 kilos of material GL60 at a total cost of $132,979.

Labour: Paid an actual rate of $8.65 per hour to the labour force. The total amount paid out, amounted to $612,766.

Overheads (all fixed): $96,840.

Required:

A. Prepare a standard costing profit statement, and a profit statement based on actual figures for the month of May.

  1. Workings

Standard variable cost per unit                                                                                 $

Materials:

003                                            6 kilos at $12.25 per kilo                                      73.50

GL60                                          3 kilos at $3.20 per kilo                                          9.60

––––––

83.10

Labour                                       4.5 hours at $8.40 per hour                                 37.80

––––––

120.90

––––––

Standard usages:

Material 003                         15,400 units should use (× 6)                       92,400 kilos

Material GL60                       15,400 units should use (× 3)                       46,200 kilos

Labour                                   15,400 units should take (× 4.5)                  69,300 hours

 

15,400 units of production and sale

  Actual   Standard
                                    $ $                                         $ $
Sales                 (at $138.25) 2,129,050 (at $140) 2,156,000
       
Costs      
Materials      
003 1,256,640 (15,400 × $73.50) 1,131,900
GL60 132,979 (15,400 × $9.60) 147,840
Labour 612,766 (15,400 × $37.80) 582,120
Fixed overheads 96,840   86,400
Total costs 2,099,225   1,948,260
Profit 29,825   207,740

2 / 4

B. Prepare a statement of the variances which reconciles the actual with the standard profit or loss figure. (Mix and yield variances are not required.)

  1. Reconciliation

Workings

Sales price                                                                                         $

15,400 units should sell for                                                    2,156,000

They did sell for                                                                        2,129,050

––––––––

Sales price variance                                                                 26,950 (A)

––––––––

Materials 003                                                                                  kg

15,400 units should use                                                            92,400

They did use                                                                                98,560

––––––

Material 003 usage variance (kg)                                           6,160 (A)

––––––

 

Standard price/kg                                                                      $12.25

Usage variance in $                                                                $75,460 (A)

 

Materials 003                                                                                  $

98,560 kg should cost (× $12.25)                                         1,207,360

They did cost                                                                           1,256,640

––––––––

Material price variance                                                          49,280 (A)

––––––––

 

 

 

 

 

 

 

 

Materials GL60                                                                               kg

15,400 units should use                                                           46,200

They did use                                                                               42,350

Material 003 usage variance (kg)                                          3,850 (F)

––––––

Standard price/kg                                                                         $3

20

Usage variance in $                                                               $12,320 (F)

Materials GL60                                                                               $

42,350 kg should cost (× $3.20)                                            135,520

They did cost                                                                            132,979

––––––

Material price variance                                                           2,541 (F)

––––––

Actual hours worked = $612,766 ÷ $8.65 = 70,840 hours

Labour efficiency                                                                       Hours

15,400 units should take                                                         69,300

They did take                                                                             70,840

–––––––

Labour efficiency variance (hrs)                                           1,540 (A)

–––––––

Standard rate/hour                                                                    $8.40

Efficiency variance in $                                                         $12,396 (A)

 

Labour rate                                                                                     $

70,840 hours should cost

(× $8.40)                                                                                    595,056

They did cost                                                                            612,766

–––––––

Material price variance                                                         17,710 (A)

–––––––

$

Fixed overhead expenditure

Budgeted fixed overhead costs                                              86,400

Actual fixed overhead costs                                                    96,840

–––––––

Expenditure variance                                                            10,440 (A)

–––––––

Reconciliation

 

Standard profit on 15,400 units of sale, on previous page

$

207,740

  Fav Adverse  
Variances: $ $  
Sales price   26,950  
Materials 003 usage   75,460  
Materials GL60 usage 12,320    
Materials 003 price   49,280  
Materials GL60 price 2,541    
Labour efficiency   12,936  
Labour rate   17,710  
Fixed overhead expenditure variance   10,440  
  14,861 192,776  
Total variances     177,915 A
Actual profit   29,825

3 / 4

C. Explain briefly the possible reasons for inter-relationships between material variances and labour variances.

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D. State TWO possible causes of an adverse labour rate variance.

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Question 13 (Cube Co)

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13. CUBE CO

Cube Co operates an absorption costing system and sells three types of product – Commodity 1, Commodity 2 and Commodity 3. Like other competitors operating in the same market, Cube Co is struggling to maintain revenues and profits in face of the economic recession which has engulfed the country over the last two years. Sales prices fluctuate in the market in which Cube Co operates. Consequently, at the beginning of each quarter, a market specialist, who works on a consultancy basis for Cube Co, sets a budgeted sales price for each product for the quarter, based on their expectations of the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself is run by the company’s sales manager, who negotiates the actual sales prices with customers. The following budgeted figures are available for the quarter ended 31 May 20X3.

Product Budgeted production and sales units Standard selling price per unit Standard variable production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28.40
Commodity 3 26,000 $41.60 $26.40

Cube Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine hours and the budgeted cost of these for the quarter ended 31 May 20X3 was $174,400. Commodities 1, 2 and 3 use 0.2 hours, 0.6 hours and 0.8 hours of machine time respectively.

The following data shows the actual sales prices and volumes achieved for each product by Cube Co for the quarter ended 31 May 20X3 and the average market prices per unit.

Product Actual production and sales units Actual selling price per unit Average market price per unit
Commodity 1 29,800 $31 $32.20
Commodity 2 30,400 $34 $33.15
Commodity 3 25,600 $40.40 $39.10

 The following variances have already been correctly calculated for Commodities 1 and 2:

Sales price operational variances

Commodity 1: $35,760 Adverse

Commodity 2: $25,840 Favourable

Sales price planning variances

Commodity 1: $65,560 Favourable

Commodity 2: $56,240 Adverse

Required:

A. Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning variance.

  1. Sales price operational variance for Commodity 3
  $
Actual sales (25,600 units ´ $40.40) 1,034,240
Revised budget at market price (25,600 units × $39.10) 1,000,960
Sales price operational variance 33,280 (F)

 

Sales price planning variance for Commodity 3

  $
Revised ‘standard’ sales price budget 39.10
Original standard sales price 41.60
Sales price planning variance per unit 2.50 (A)
Units sold 25,600
Sales price planning variance in total $64,000 (A)

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B. Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and the total sales quantity variance.

Total sales mix variance

  Actual total sales in actual mix Actual total sales in standard mix (W1) Sales mix variance in units ´ Standard profit margin (W2) Variance

$

Commodity 1 29,800 units 30,643 units 843 (A) ´ $11.20 9,442 (F)
Commodity 2 30,400 units 28,600 units 1,800 (F) ´ $4.20 7,560 (A)
Commodity 3 25,600 units 26,557 units 957 (A) ´ $12.00 11,484 (A)
  85,800 units 85,800 units     13,366 (A)

 

 

 

 

 

Total sales quantity variance

Budgeted total sales units (30,000 + 28,000 + 26,000) 84,000
Actual total sales units 85,800
Total sales quantity variance in units 1,800 (F)
Average standard profit per unit (W3) $9.11
Total sales quantity variance $16,406 (F)

 

Workings

  • Actual sales quantity in standard mix
Product Actual quantity in standard mix
Commodity 1: 85,800 ´ 30/84 = 30,643
Commodity 2: 85,800 ´ 28/84 = 28,600
Commodity 3: 85,800 ´ 26/84 = 26,557
  85,800

 

  • Standard profit margins per unit

 

Overhead absorption rate (OAR) =                              $174,400

[(0.2 × 30,000) + (0.6 × 28,000) + (0.8 × 26,000)]

= $4 per hour

 

Product Commodity 1 Commodity 2 Commodity 3
  $ $ $
Standard selling price 30.00 35.00 41.60
Variable production costs (18.00) (28.40) (26.40)
Fixed production overheads

($4 per hr)

 

(0.80)

 

(2.40)

 

(3.20)

Standard profit margin 11.20 4.20 12.00

 

 

 

  • Average standard profit per unit
  Budgeted sales units Standard profit per unit Budgeted profit
    $ $
Commodity 1 30,000 11.20 336,000
Commodity 2 28,000 4.20 117,600
Commodity 3 26,000 12.00 312,000
  84,000   765,600

 

Budgeted average profit per unit = $765,600/84,000 = $9.11

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C. Briefly discuss the performance of the business and, in particular, that of the sales manager for the quarter ended 31 May 20X3.

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Question 14 (Soap Stories)

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14. SOAP STORIES

Soap Stories makes environmentally friendly soap using three basic ingredients. The standard cost card for one batch of soap for the month of September was as follows:

Material                                      Kilograms                                Price per kilogram ($)

Lye                                                    0.25                                                    10

Coconut oil                                       0.6                                                      4

Shea butter                                      0.5                                                      3

The budget for production and sales in September was 120,000 batches. Actual production and sales were 136,000 batches. The actual ingredients used were as follows:

Material                                 Kilograms

Lye                                             34,080

Coconut oil                               83,232

Shea butter                              64,200

Required:

A. Calculate the total material mix variance and the total material yield variance for September.

  1. Variance calculations

Mix variance

Total kg of materials per standard batch = 0.25 + 0.6 + 0.5 = 1.35 kg

Therefore, standard quantity to produce 136,000 batches = 136,000 × 1.35 kg = 183,600 kg

Actual total kg of materials used to produce 136,000 batches = 34,080 + 83,232 + 64,200 = 181,512 kg

 

 

 

 

Material Actual quantity standard mix in kgs Actual quantity actual mix in kgs Variance in kgs Standard cost per kg in $ Variance

$

Lye 181,512 × 0.25/1.35 = 33,613.33 34,080 (466.67) 10 (4,666.70)
Coconut oil 181,512 × 0.6/1.35 = 80,672 83,232 (2,560.00) 4 (10,240.00)
Shea butter 181,512 × 0.5/1.35 = 67,226.67 64,200 3,026.67 3 9,080.01
  181,512 181,512     (5,826.69) A

 

Yield variance

Material Standard quantity standard mix in kgs Actual quantity standard mix in kgs Variance in kgs Standard cost per kg in $ Variance $
Lye 0.25 × 136,000 = 34,000 33,613.33 386.67 10 3,866.70
Coconut oil 0.6 × 136,000 = 81,000 80,672 928 4 3,712
Shea butter 0.5 × 136,000 = 68,000 67,226.67 773.33 3 2,319.99
183,600 181,512   9,898.69 F

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B. In October the materials mix and yield variances were as follows:

Mix: $6,000 adverse

Yield: $10,000 favourable

The production manager is pleased with the results overall, stating:

‘At the beginning of September, I made some changes to the mix of ingredients used for the soaps. As I expected, the mix variance is adverse in both months because we haven’t yet updated our standard cost card but, in both months, the favourable yield variance more than makes up for this. Overall, I think we can be satisfied that the changes made to the product mix are producing good results and now we are able to produce more batches and meet the growing demand for our product.’

The sales manager, however, holds a different view and says:

‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales volume variance for October was $22,000 adverse. I’ve tried to explain that the quality of the soap has declined slightly and some of my customers have realised this and simply aren’t happy, but no-one seems to be listening. Some customers are even demanding that the price of the soap be reduced and threatening to go elsewhere if the problem isn’t sorted out.’

i) Briefly explain what the adverse materials mix and favourable materials yield variances indicate about production at Soap Stories in October.

Note: You are NOT required to discuss revision of standards or operational and planning variances.

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ii) Discuss whether the sales manager could be justified in claiming that the change in the materials mix has caused an adverse sales volume variance in October.

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C. Critically discuss the types of standard used in standard costing and their effect on employee motivation.

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