Practice Questions - Variances - Exam 2020 - S2

Question 3:

Alsonis the cost accountant at a manufacturer of exquisite glass serving bowls. The materials used for the bowls are inexpensive, but the process is labour intensive. The supervisor decided to use cheaper labour this period to see whether costs could be reduced.Alsonneeds to prepare a report for her supervisor about how effective operations had been during the month of January. She haspreviouslyset the following standards.

Cost per unit
Direct materials	3.5 kg @ $2.40	$8.4
Directlabour	5.5 hours @ $14	77
Factory overhead:
Variable	$3 per directlabourhour	16.5
Fixed	$25 per unit	25.00

Variable overhead is allocated by labour hours and fixed overhead is allocated by unit. Estimated production per month is 8000 units (44000 direct labour hours) with fixed overhead expenditure budgeted at $200,000.

Records for January, based on production of7800 units, indicated the following:

Direct materials purchased	28000 kg @ $2.8	$78,400
Direct materials used	24500 kg
Directlabour	40500 hours @ $14.85	$601,425
Variable overhead		$130,700
Fixed overhead		$205,000

Required

1. Prepare a flexible budget to enable assessment of the strategy undertaken by management.

[8 marks]

1. Discuss the variances and recommend whether any of them should be investigated further.

[5 marks]

1. Calculate the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead and comment on the result.[7mark]