1. Anderson Ltd. manufacture gearboxes for use in cars. At thestart of the
year, the management of Anderson Ltd. estimated that its costswould be:
This was based on the following:
| Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead | 8 50 8 12 5 |
80 employees
2000 hours worked by each employee
40 000 gearboxes manufactured in the year as budgetedproduction
ΓΒ£200 unit selling price.
You have recently been employed by the company to establish astandard
costing system. At the end of the year you were able to extractthe
following information:
Γ’ΒΒ’ labour costs ΓΒ£4.40/hour
Γ’ΒΒ’ 32 000 units sold
Γ’ΒΒ’ ΓΒ£210/unit selling price
Γ’ΒΒ’ 160 000 hours were worked
Γ’ΒΒ’ variable production overheads were ΓΒ£640 000
Γ’ΒΒ’ fixed production overheads were ΓΒ£810 000
Γ’ΒΒ’ administration costs were ΓΒ£350 000
Γ’ΒΒ’ raw material prices were 10% higher than expected
Γ’ΒΒ’ total expenditure on raw material was ΓΒ£3.696 M
Γ’ΒΒ’ there were no opening or closing stocks of raw materials.
(a) You are required to prepare an operating statement for theyear, using
a standard absorption costing system.
Calculations should proceed according to the followingheadings
suffixing Γ’ΒΒAΓ’ΒΒ for Adverse and Γ’ΒΒFΓ’ΒΒ for Favourable whereappropriate.
Resulting quantities required for the statement are then enteredin the
Γ’ΒΒOperating Statement for the YearΓ’ΒΒ sheet shown on page 6.
(All working must be shown.)
(Budgeted) Costs
Unit cost
ΓΒ£
Direct labour
Direct materials
Variable overhead
Fixed overhead
Admin. overhead
Total
Selling price
Standard profit (per unit)
Budgeted profit
Sales price variance
Sales quantity variance
Cost Variances
Labour Variances
Standard hours =
Standard cost/hour =
Rate variance =
Standard time =
Actual time =
Time variance =
Efficiency variance =
Material Variances
Material price =
Material usage Γ’ΒΒ standard =
Γ’ΒΒ actual =
Material usage variance =
Variable overheads
Standard cost =
Actual cost =
Expenditure variance =
Efficiency variance =
Fixed overheads
Expenditure variance =
Volume variance =
Admin overhead (treat as fixed)
Expenditure variance =
Volume variance =
Operating Statement for the Year
Γ£ÒΒΒ000 Γ£ÒΒΒ000
Budgeted Profit
Sales variance Γ’ΒΒprice
Γ’ΒΒ quantity
Cost variances
Labour Γ’ΒΒ rate
Γ’ΒΒ efficiency
Material Γ’ΒΒ price
Γ’ΒΒ usage
Variable Γ’ΒΒ expenditure
Γ’ΒΒ efficiency
Fixed Γ’ΒΒ expenditure
Γ’ΒΒ volume
Admin Γ’ΒΒ expenditure
Γ’ΒΒ volume
Actual Profit
(b) Give reasons/explanations why the variances in (a) abovehave
occurred for the following:
(i) material price
(ii) labour efficiency
(iii) fixed overhead expenditure.
(c) The accountant suggests that a standard marginal costingsystem may
be more suitable. He asks you to outline the strengths and
weaknesses of both systems and recommend the most suitable.
(d) The Board of Anderson Ltd. want to adopt Γ’ΒΒidealΓ’ΒΒ standardsbecause
they feel it will encourage harder work. You are asked toproduce a
brief report giving your views.
