Question
ABC Company produces small steel barns. The company sells its product at $3,000 per unit and normally produces 5,000 units annually. StoreMe uses a standard
ABC Company produces small steel barns. The company sells its product at $3,000 per unit and normally produces 5,000 units annually.
StoreMe uses a standard costing system to account for production cost variances. At the beginning of 2021, standard costs per one barn were estimated as follows:
- Direct material cost (6 metal sheets * $200) $1,200
- Direct labour cost (10 hours * $20) $200
- Overhead ($500 per unit, including $100 of variable overhead cost) $500
- Total $1,900
During 2021, the company received an order (1,000 units) from DEF Company. As a result, 5,000 of units produced were sold at its normal regular price of $3,000 per unit and 1,000 of units produced were sold to ABC Company at $2,800 per unit.
To produce the 6,000 units, the company incurred the following costs:
- Materials purchased and used (36,200 metal sheets * $200) $7,240,000
- Direct labour cost (62,000 hours * $21) 1,302,000
- Variable overhead $600,000
- Fixed overhead $3,000,000
Required:
- Calculate the production cost variances (material price variance, material quantity variance, labour rate variance, and labour efficiency variance) and indicate whether they were favorable or unfavorable (each variance). (6 marks)
- Calculate the financial impact of the 1,000-unit special order from ABC company on the overall performance of StoreMe. (4 marks)
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