- 15 Marks
Question
Zealow Ltd has just introduced a new standard marginal costing system to assist in the planning and control of the production activities for the single product which the company manufactures, “The Stand.” The system became operational on 1 March 2017.
The Management Accountant has consulted with the Senior Engineer and they have agreed on the following standard specifications to manufacture one unit of the product known as “The Stand”:
- Direct materials: 4kg @ GH¢1.75 per kg
- Direct labour: 2 hours @ GH¢10 per hour
- Variable overhead: 2 hours @ GH¢8.25 per hour
The Marketing Director has advised that in Zealow Ltd’s industry, the budgeted selling price is normally calculated to achieve a mark-up of 30% on cost.
The budgeted level of production and sales activity has been agreed with both production managers and sales staff at 24,000 units per month.
The actual results for the month of March 2017 are as follows:
- Sales: 22,000 units yielding a total revenue of GH¢1,276,000
- Production: 23,000 units
- Direct Materials: 90,000 kgs at a cost of GH¢162,000
- Direct labour: 48,000 hours at a cost of GH¢576,000
- Variable overhead: GH¢350,000
Required:
a) Calculate the standard selling price of one unit of “The Stand” and prepare a summary budgeted profit statement for Zealow Ltd for the month of March 2017.
b) Calculate the relevant variances for March 2017 under the headings of sales, materials, labour, and overheads.
c) Zealow Ltd uses a standard marginal costing system and therefore fixed costs have been ignored in the calculations shown above. Assuming that the fixed costs for the company are estimated to be GH¢1,879,200 per annum, calculate the monthly sales in both units and value that will be required to break-even and estimate the margin of safety, based on the current budget levels.
Answer
a) Standard selling price and budgeted profit statement for March 2017:
Standard Selling Price Calculation:
| Component | Calculation | Amount (GH¢) |
|---|---|---|
| Direct materials | 4kg @ GH¢1.75 per kg | 7.00 |
| Direct labour | 2 hours @ GH¢10 per hour | 20.00 |
| Variable overhead | 2 hours @ GH¢8.25 per hour | 16.50 |
| Standard marginal cost | 43.50 | |
| Standard contribution (Mark-up) | 30% on GH¢43.50 | 13.05 |
| Standard selling price | 56.55 |
Budgeted Profit Statement for March 2017:
| Description | Calculation | Amount (GH¢) |
|---|---|---|
| Sales (24,000 units @ GH¢56.55) | 24,000 x 56.55 | 1,357,200 |
| Direct materials | 24,000 units @ GH¢7.00 | 168,000 |
| Direct labour | 24,000 units @ GH¢20.00 | 480,000 |
| Variable overhead | 24,000 units @ GH¢16.50 | 396,000 |
| Total Costs | 1,044,000 | |
| Budgeted Profit | Sales – Total Costs | 313,200 |
(2 marks)
b) Relevant variances for March 2017:
Sales Variances:
| Variance Type | Calculation | Amount (GH¢) |
|---|---|---|
| Sales Price Variance | (GH¢1,276,000 – 22,000 x GH¢56.55) | 31,900 (Favourable) |
| Sales Volume Variance | (24,000 – 22,000) x GH¢13.05 | 26,100 (Adverse) |
Material Variances:
| Variance Type | Calculation | Amount (GH¢) |
|---|---|---|
| Material Price Variance | (GH¢162,000 – 90,000 x GH¢1.75) | 4,500 (Adverse) |
| Material Usage Variance | (23,000 x 4 – 90,000) x GH¢1.75 | 3,500 (Favourable) |
Labour Variances:
| Variance Type | Calculation | Amount (GH¢) |
|---|---|---|
| Labour Rate Variance | (GH¢576,000 – 48,000 x GH¢10) | 96,000 (Adverse) |
| Labour Efficiency Variance | (23,000 x 2 – 48,000) x GH¢10 | 20,000 (Adverse) |
Overhead Variances:
| Variance Type | Calculation | Amount (GH¢) |
|---|---|---|
| Overhead Expenditure Variance | (48,000 x GH¢8.25 – GH¢350,000) | 46,000 (Favourable) |
| Overhead Efficiency Variance | (23,000 x 2 – 48,000) x GH¢8.25 | 16,500 (Adverse) |
(10 marks)
c) Break-even point and margin of safety:
| Description | Calculation | Amount |
|---|---|---|
| Contribution per unit | GH¢13.05 | GH¢13.05 |
| Contribution to sales ratio | GH¢13.05 / GH¢56.55 | 0.2307 |
| Break-even point (units) | GH¢1,879,200 / GH¢13.05 | 12,000 units |
| Break-even point (sales value) | 12,000 units x GH¢56.55 | GH¢678,600 |
| Margin of safety | (24,000 – 12,000) / 24,000 | 50% or 12,000 units |
(3 marks)
(Total: 15 marks)
- Topic: Standard Costing and Variance Analysis
- Series: NOV 2017
- Uploader: Dotse