1. Anderson Ltd. manufacture gearboxes for use in cars. At the start of the year, the management of Anderson Ltd. estimated that its costs would be:

	% of sales value
Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead	8 50 8 12 5

This was based on the following: 80 employees 2000 hours worked by each employee 40 000 gearboxes manufactured in the year as budgeted production 200 unit selling price. You have recently been employed by the company to establish a standard costing system. At the end of the year you were able to extract the following information: labour costs 4.40/hour 32 000 units sold 210/unit selling price 160 000 hours were worked variable production overheads were 640 000 fixed production overheads were 810 000 administration costs were 350 000 raw material prices were 10% higher than expected total expenditure on raw material was 3.696 M there were no opening or closing stocks of raw materials.

Q1. (Budgeted) costs

	Unit cost
Direct labor	16.00
Direct materials	100.00
Variable overheads	16.00
Fixed overhead	24.00
	156.00
Admin. Overhead	10.00
Total	166.00
Selling price per unit	200.00
Standard profit (per unit)	34.00
	40000
Budgeted profit	1360000
Sales price variance [(210-200) x 32000]	320000
Sales quantity variance [(32000-40000) x 210]	-1680000

(b) Give reasons/explanations why the variances in (a) above have occurred for the following:

(i) material price (ii) labour efficiency (iii) fixed overhead expenditure.

(c) The accountant suggests that a standard marginal costing system 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 ideal standards because they feel it will encourage harder work. You are asked to produce a brief report giving your views