Ceramo Potterymanufactures a diverse range of flower pots and saucersof extraordinary durability, quality, and design.The company has a reputation of being a high-quality flower pot producer in the country. One of its products, Elegant Pottery, is crafted from an extraordinarily high-fired stoneware clay. The uniqueness of the product quality and design has gained much demand over the years and been widely exported to European countries. Recently, the profit of the company has deviated greatly from its target. Hence, headquarters has initiated variance analysis to identify the reasons for the difference in profit.

The following information has been collected from the costing system of the company:

Standard selling price per unit$98

Less: Standard variable cost per unit

Direct material (5kg at $3 per kg)$15

Direct labor (6 hours at $8 per hour)$48

Variable overhead (6 hours at $2 per hour)*$12

Standard contribution per unit$23

*The company absorbs overheads using direct labor hours.

Budget

Actual

Production and sales

3,000 units

2,700 units

Direct materials

15,000 kg

at $3 per kg

14,850 kg

at $3.10 per kg

Direct labor

18,000 hours

at $8 per hour

17,200 hours

at $8.50 per hour

Variable overhead

$36,000

$33,540

Fixed overhead

$27,000

$28,000

Profit

$42,000

$10,825

The actual selling price was identical with the budgeted selling price and there were no opening and closing inventory during the period.

(a) Determine the standard cost per unit based on absorption costing approach.(3 marks)

Report question issue

(b) Prepare a detailed variance analysis for the month of October 2020.(Hints: Calculate the variances for sales, direct material, direct labor, variable overheads and fixed overheads).(10 marks)

(c) Based on the analysis above, briefly explain theTWOpossible causes of the big difference between budgeted and actual profit.(4 marks)

(d) It is imperative that setting targets in budgeting process should be done tactfully in order to achieve optimal performance. Targets must be realistic so that employees will be motivated to achieve them. However, current practice in some organizations tends to differ from this view. They strive to achieve targets which are considered as "unachievable". Explain how targets can be stretched to achieve the "unachievable".(8 marks)