5 2. Year end has arrived at Aloha Company, and you have been asked to assist the manager in the calculation and interpretation of production variances for the year. The following is the standard cost information for Aloha Company's only product: Direct materials, 2.5 litres at $4.00 / litre $10.00 Direct labour, 1.2 hours at $12.00 / hour $14.40 Variable overhead, 1.2 hours at $3.00 / hour $ 4.50 Fixed overhead, $150,000 / 20,000 units $ 7.50 Standard cost per unit $36.40 The company manufactured and sold 24,000 units of product during the year. A total of 62,000 litres of raw materials were purchased during the year at total cost of $252,960. All of this material was used to manufacture the 24,000 units. The company records showed no beginning or ending inventories for the year. The company worked 26,400 direct labour hours during the year at a cost of $13.50 per hour. Variable overhead costs are applied to products on the basis of direct labour hours. Actual total variable overhead costs were $115,000. Actual fixed overhead costs incurred were $158,000. The budgeted fixed overhead rate was calculated based on expected production of 20,000 units. Required: Note that work must be shown to earn marks. a) Compute the direct materials price and quantity variances for the year. Provide a plausible explanation for the variances you have calculated. b) Compute the direct labour rate and efficiency variances for the year. Provide a plausible explanation for the variances you have calculated. c) Compute the variable overhead spending and efficiency variances for the year. Provide a plausible explanation for the variances you have calculated. d) Compute the fixed overhead budget and volume variances for the year. Provide a plausible explanation for the variances you have calculated. 3. Arguments have been posed that although techniques such as variable costing may well be preferable for supporting management decision-making, companies are unlikely to use them, using instead the techniques that are required by Generally Accepted Accounting Principles (GAAP) for external financial statement preparation. Required: a) What is the difference in the way the cost of inventory is determined using variable costing and the technique that is acceptable under GAAP? b) Describe two ways in which variable costing provides better information for management decision-making, in comparison to absorption costing. Be specific about the nature of the decisions that are affected. c) What is lean production? Would the decision to use lean production eliminate the debate over whether inventory should be costed using variable or absorption costing? Explain why this position has been taken. 5 5 5 2 4 2