Management of Freeport Auto Limited wants improve its production process by minimising wastes. The entity currently operates a marginal costing system when preparing its operating budget. The entity currently manufactures tyres to be sold for retailing purposes. Each tyre has a budgeting selling price of $5,000. Below are the costs which apply to each tyre: Direct materials 10 kgs @ $250 per kip Direct labour 20 hours @ $25 per hour Fixed Overheads 20 hours @ $50 per hour $2,500 $500 $1,000 It is expected that all units produced will be sold by the end of each period. The entity budgeted to produce 2,500 tyres for the entire year. However, actual production and sales were 20% less than budgeted. However, the actual selling price per tyre was 10% more than budgeted, For the period just ended the entity purchased and used 24,000 kilograms of direct materials costing $7,200,000. Meanwhile, the entity used 50,000 labour hours costing $3,000,000. The fixed overheads amounted to $1,600,000. Required: a. Outline to management the benefits of employing Kaizen principles to the production process. [5 marks] b. Prepare the budgeted operating statement using marginal costing approach [6 marks] c. Compute the following variance which relate to Freeport Auto's marginal costing system: Total sales variance [4 marks] Total material variance [4 marks] Total labour variance [4 marks] Fixed overhead expenditure variance [3 marks] d. Prepare the actual operating statement and reconcile actual to budgeted [14 marks] i. ii. iii. iv.

Management of Freeport Auto Limited wants improve its production process by minimising wastes. The entity currently operates a marginal costing system when preparing its operating budget. The entity currently manufactures tyres to be sold for retailing purposes. Each tyre has a budgeting selling price of $5,000. Below are the costs which apply to each tyre: It is expected that all units produced will be sold by the end of each period. The entity budgeted to produce 2,500 tyres for the entire year. However, actual production and sales were 20% less than budgeted. However, the actual selling price per tyre was 10% more than budgeted, For the period just ended the entity purchased and used 24,000 kilograms of direct materials costing $7,200,000. Meanwhile, the entity used 50,000 labour hours costing $3,000,000. The fixed overheads amounted to $1,600,000. Required: a. Outline to management the benefits of employing Kaizen principles to the production process. [5 marks] b. Prepare the budgeted operating statement using marginal costing approach [6 marks] c. Compute the following variance which relate to Freeport Auto's marginal costing system: i. Total sales variance ii. Total material variance iii. Total labour variance d. Prepare the actual operating statement and reconcile actual to budgeted [4 marks] [4 marks ] [4 marks ] [3 marks ] [14 marks]