Dr Stone is the founder of Rust Free Pte Ltd (RFPL), a company providing pipe installations for motor vehicles. RFPL was incorporated following the successful patent filed by Dr Stone for his ingenious coating process that makes steel permanently impervious to corrosion. RFPL has three service centres evening spread across the island. The company provides a life- time warranty for pipes installed at these service centres. Although business has been increasing steadily over the years, this has not translated into better profitability for the company. Dr Stone, being a scientist by training, is absolutely perplexed and has decided to engage a new financial controller, Ms Copper to look into the matter. Initial investigations by Ms Copper revealed that profitability has been adversely affected by the centre managers' excessive spending of resources. Ms Copper recommended to reduce the centre's costs and monitor the centre managers' performance through the implementation of a standard cost system. Each service centre provides two services: (1) Replacement of non-RFPL pipes with modern RFPL pipes. (2) Warranty replacement of defective RFPL pipes with new RFPL pipes. These services require materials (including coating treatment) and direct labour. Materials purchases, installation procedures, and labour allocation are strictly the responsibility of each centre manager. Since RFPL pipes are merely ordinary pipes that are treated with RFPL patented coating process, centre managers were free to decide on which supplier to obtain the pipes from. Coating process is done at each centre. After a detailed study, the following cost standards per installation is implemented. Materials Direct labour hour Direct labour rate $60 0.5 hour $23.60 Cost data for the three service centres in the East, West and South for the first year following implementation of the standard cost system is as follows: Budgeted installations Actual installations Materials costs Direct labour hours Actual labour rate East 15,000 14,500 $710,500 5,800 $22.00 West 22,500 22,250 $1,346,125 10,569 $24.00 South 10,000 11,500 $759,000 6,325 $26.00 Note: Actual installations include both original and warranty installations. Required: (a) Calculate the relevant variances for each of the three service centres. Interpret the calculated variance and evaluate the relative performance of each service centre based on the calculated variances. (15 marks) (b) An MBA intern at the company presented the following analysis of the various service centres pursuant to the implementation of the standard costing system: Out of the total 14,500 installations performed at the East service centre, 500 involved the originally installed RFPL pipes being fully replaced under warranty with new RFPL pipes. Out of the 22,250 installations performed at the West service centre, 100 involved original installations requiring full warranty replacement. Out of the 11,500 installations performed at the South service centre, only eight installations required full warranty replacement. Note: Only warranty installations performed subsequent to the implementation of standard costing implementation are considered. Has your evaluation performed in part (a) changed with this new information? Is the standard costing system still effective in meeting its objectives? What improvements can be made? (10 marks) Dr Stone is the founder of Rust Free Pte Ltd (RFPL), a company providing pipe installations for motor vehicles. RFPL was incorporated following the successful patent filed by Dr Stone for his ingenious coating process that makes steel permanently impervious to corrosion. RFPL has three service centres evening spread across the island. The company provides a life- time warranty for pipes installed at these service centres. Although business has been increasing steadily over the years, this has not translated into better profitability for the company. Dr Stone, being a scientist by training, is absolutely perplexed and has decided to engage a new financial controller, Ms Copper to look into the matter. Initial investigations by Ms Copper revealed that profitability has been adversely affected by the centre managers' excessive spending of resources. Ms Copper recommended to reduce the centre's costs and monitor the centre managers' performance through the implementation of a standard cost system. Each service centre provides two services: (1) Replacement of non-RFPL pipes with modern RFPL pipes. (2) Warranty replacement of defective RFPL pipes with new RFPL pipes. These services require materials (including coating treatment) and direct labour. Materials purchases, installation procedures, and labour allocation are strictly the responsibility of each centre manager. Since RFPL pipes are merely ordinary pipes that are treated with RFPL patented coating process, centre managers were free to decide on which supplier to obtain the pipes from. Coating process is done at each centre. After a detailed study, the following cost standards per installation is implemented. Materials Direct labour hour Direct labour rate $60 0.5 hour $23.60 Cost data for the three service centres in the East, West and South for the first year following implementation of the standard cost system is as follows: Budgeted installations Actual installations Materials costs Direct labour hours Actual labour rate East 15,000 14,500 $710,500 5,800 $22.00 West 22,500 22,250 $1,346,125 10,569 $24.00 South 10,000 11,500 $759,000 6,325 $26.00 Note: Actual installations include both original and warranty installations. Required: (a) Calculate the relevant variances for each of the three service centres. Interpret the calculated variance and evaluate the relative performance of each service centre based on the calculated variances. (15 marks) (b) An MBA intern at the company presented the following analysis of the various service centres pursuant to the implementation of the standard costing system: Out of the total 14,500 installations performed at the East service centre, 500 involved the originally installed RFPL pipes being fully replaced under warranty with new RFPL pipes. Out of the 22,250 installations performed at the West service centre, 100 involved original installations requiring full warranty replacement. Out of the 11,500 installations performed at the South service centre, only eight installations required full warranty replacement. Note: Only warranty installations performed subsequent to the implementation of standard costing implementation are considered. Has your evaluation performed in part (a) changed with this new information? Is the standard costing system still effective in meeting its objectives? What improvements can be made? (10 marks)