QUESTION 1

Adom Ltd makes and sells a single product, product Q, with the following standard specification for materials: Quantity Price per kg Kg GHS Direct material X 12 40 Direct material Y 8 32 It takes 20 direct labour hours to produce one unit with a standard direct labour cost of GHS10 per hour. The annual sales/production budget is 2,400 units evenly spread throughout the year. The standard selling price was GHS1, 250 per unit. The budgeted production overhead, all fixed, is GHS288, 000 and expenditure is expected to occur evenly over the year, which the company divides into 12 calendar months. Absorption is on direct labour hours.

For the month of October the following actual information is provided

Sales (220 units) 264,000

Cost of sales Direct material 159,000

Direct wages 45,400

Fixed production overhead 23,000

Gross profit 36,600

Administration costs 13,000

Selling and distribution costs 8,000

Net profit 15,600

Costs of opening inventory, for each material, were at the same price per kilogram as the purchase made during the month but there had been changes in the materials inventory levels, viz.:

1 October 30 October

Kg Kg

Material X 680 1,180

Material Y 450 350

Material X purchases were 3,000 kg at GHS42 each. Material Y purchases were 1,700 kg at GHS 30 each. The number of direct labour hours worked was 4600 and the total wages incurred GHS45, 400. Work-in-progress and finishes goods inventories may be assumed to be the same at the beginning and the end of October

Required

a) Present a standard product cost for one unit of product Q showing the standard selling price and standard gross profit per unit

b) Calculate appropriate variances for the materials, labour, fixed production overhead and sales, noting that it is the company policy to calculate material price variances at the time of issue to production and that the firm calculate mix and yield variances

c) Present a statement for management reconciling the budgeted gross profit with the actual gross profit