orchid Ltd. is a small furniture manufacturer. It was established as a family-ow
ID: 2421771 • Letter: O
Question
orchid Ltd. is a small furniture manufacturer. It was established as a family-owned business 30 years ago and prides itself on high-quality products. Most of its products are made to order as a result of direct orders from Internet-based sales. Typically the company has been profitable, operating at the top end of the market; recently, however, costs appear to have been increasing and the company has also seen a decline in its sales. The workforce is highly skilled and recently several of the experienced craftspeople who make the products have retired, and the company has had problems recruiting, training and retaining suitably skilled employees. One of its products, a table, has the following standard costs:
The table is made from solid oak and the above materials reflect the size of the table in square metres. The labour required to make the table is highly skilled.
The monthly production and sales are planned to be 800 units. The actual results for March were as follows:
There were no opening or closing stocks. The company manufactured and sold 810 tables; this is more than budgeted due to a successful marketing campaign.
Required
Parts 1 and 2 should be submitted as an operating statement, as per your Key Concept Overview, and within the Business Report as required for part 3.
1-Calculate the flexed and actual budget.
2-Calculate the following variances:
3-Sales variances; volume and price
4-Direct material variances; usage and price
5-Direct labour variances; efficiency and rate
6-Fixed overhead variance; spending
Please explan where possible.
£ Direct materials (8m @ £30/m) 240.00 Direct labour (10 hours @ £25/hr) 250.00 Fixed overheads 160.00 650.00 Selling price 950.00 Standard profit margin 300.00Explanation / Answer
1. Actual budget was for 800 units, however since the production was 810 units, the flexed budget will be for 810 units. The fixed overhead, however, will remain the same.
2. Sales variance:
Volume variance = Standard price * (Actual quantity - Standard quantity) = 950*(800-810) = 9,500 F
Price variance = Standard quantity * (Actual price - Standard price) = 800*(930-950) = 16,000 U
Actual price = Actual sales/ actual quantity = 753,300/810 = 930
Due to a high unfavourable price variance, the actual sales is lower than both the actual budget and flexed budget, whihc has impacted negatively
3. Direct Materials variance :
Price variance: Actual quantity * (Actual price - Standard price) = 810* (237.65 - 240) = 1,900 F
Actual price = 192,500/ 810 = 237.65
Volume Variance = Standard price * ( Actual quantity - Standard quantity) = 30* (810-800) = 2,400 U
4. Direct Labor variance:
Efficiency variance = Standard rate * (Actual hours - Standard hours) = 25 * (8,500 - 8,100) = 10,000 U
Price Variance = Actual hours * (Actual rate - Standard rate) = 8,500 * (26-25) = 8,500 U
Actual rate = 221,000/ 8,500 = 26
Fixed overhead variance = 130,000 -128,000 U
Actual Budget Flexed budget Per Unit 800 Units Per Unit 810 units Direct Materials 240 192,000 240 194,400 Direct Labor 250 200,000 250 202,500 Fixed Overhead 160 128,000 158 128,000 650 520,000 648 524,900 Sales 950 760,000 950 769,500 Standard profir margin 300 240,000 302 244,600Related Questions
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