Dash Ltd adopted a standard costing system several years ago. The standard costs for the prime costs of its single product are:

Materials (8 kilograms * $5.00/kg): $40.00

Labour (6 hours * $8.20/hr.): $49.20

All materials are added at the beginning of processing. These operating data were taken from the records for November.

In-process beginning inventory: none

In-process ending inventory complete as to labour: 800 units, 75%

Units completed: 5,600 units

Budgeted output: 6,000 units

Purchases of materials kilograms: 50,000

Total actual labour costs: $300,760

Actual hours of labour: 36,500 hours

Materials usage variance unfavorable: $1,500

Total materials variance unfavourable: $750

Required:

a Compute for November:

i The labour efficiency variance

ii The labour rate variance

iii The actual number of kilograms of materials used in the production process during the month

iv The actual price paid per kilogram of material during the month v The total amounts of material and labour cost transferred to the finished goods account

vi The total amount of material and labour cost in the ending balance of the work-in-process inventory at the end of November.

b Should the performance of a division be deemed less than satisfactory if all of its variances are unfavourable? Discuss.

c Assume Dash Ltd. budgeted 5,000 machine hours to manufacture the 6,000 units planned for November. The budgeted total fixed manufacturing overhead was $900,000. Since the company only manufactured and sold 5,600 units, it would report a loss of $960,000 after charging the production volume variance to the cost of goods sold for the period. Bob, the Vice President Finance, believes the denominator activity level of 5,000 machine hours is too low as the maximum capacity of the firm is at 500,000 machine hours. Bob believes that the denominator level should be at least half of the maximum capacity. He was able to show a substantial improvement in operating income after revising the cost data. He used the revised operating results to brief financial analysts.

Required:

How does the choice of the denominator volume level in setting fixed overhead application rates provide managers with an opportunity to manage earnings?