Junkets and Jams (“JJ”) mass-produces a range of preserves which are intensively marketed to undiscriminating customers. All their products are produced in the same manufacturing process and the only difference between them arises from the artificial colours and flavours added. The company uses a standard costing system.

The standard cost and profit of one jar of preserve is as follows:

                                                                                          £

Materials: Ingredients (0.1kg @ £2.00 per kg)                0.20

                  Jar (one jar at 12 pence)                                 0.12

Labour (3 minutes at £6 per hour)                                    0.30

Variable overheads:                                                          0.06

Fixed overheads:                                                               0.12

Unit cost                                                                           0.80

Unit profit                                                                         0.90

Selling price                                                                      1.70

Budgeted sales for the month just ended were 200,000 units.

The actual results for the month were:                                  £

Sales (194,000 units)                                                      313,800

Ingredients (21,000 kg)                                                    39,000

Jars (197,000 jars purchased)                                           24,640

Labour (9,700 hours)                                                        61,200

Variable overheads                                                           10,520

Fixed overheads                                                                23,500

Total costs                                                                       158,860

There were no opening or closing stocks of ingredients, jars or finished products. The entire month’s production was sold.

REQUIRED:

1. Calculate all appropriate variances and reconcile the budgeted and actual profit for the month.    

Analyse the problems that may be encountered in operating a system of standard costing.