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:

This was based on the following:

Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead

8 50 8 12 5

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.

(a) You are required to prepare an operating statement for the year, using

a standard absorption costing system.

Calculations should proceed according to the following headings

suffixing A for Adverse and F for Favourable where appropriate.

Resulting quantities required for the statement are then entered in the

Operating Statement for the Year sheet shown on page 6.

(All working must be shown.)

(Budgeted) Costs

Unit cost

Direct labour

Direct materials

Variable overhead

Fixed overhead

Admin. overhead

Total

Selling price

Standard profit (per unit)

Budgeted profit

Sales price variance

Sales quantity variance

Cost Variances

Labour Variances

Standard hours =

Standard cost/hour =

Rate variance =

Standard time =

Actual time =

Time variance =

Efficiency variance =

Material Variances

Material price =

Material usage standard =

actual =

Material usage variance =

Variable overheads

Standard cost =

Actual cost =

Expenditure variance =

Efficiency variance =

Fixed overheads

Expenditure variance =

Volume variance =

Admin overhead (treat as fixed)

Expenditure variance =

Volume variance =

Operating Statement for the Year

000 000

Budgeted Profit

Sales variance price

quantity

Cost variances

Labour rate

efficiency

Material price

usage

Variable expenditure

efficiency

Fixed expenditure

volume

Admin expenditure

volume

Actual Profit

(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.