QUESTION 1

1. Boch Steel is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary workers, whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the responsibility of the company's purchasing department and the company's policy is to hold low levels of raw materials in order to minimize inventory holding costs. Boch Steel uses cost plus pricing to set the selling prices for its products once an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis. Detailed variance reports are produced each month for sales, material costs and labor costs. Departmental managers are then paid a monthly bonus depending on the performance of their department. One month ago, Boch Steel began production of a new product. The standard cost card for one unit was drawn up to include a cost of RM84 for labor, based on seven hours of labor at RM12 per hour. Actual output of the product during the first month of production was 460 units and the actual time taken to manufacture the product totaled 1,860 hours at a total cost of RM26,040.

After being presented with some initial variance calculations, the production manager has realized that the standard time per unit of seven hours was the time taken to produce the first unit. He has consequently been criticized by other departmental managers who have said that, 'He has no idea of all the problems this has caused.'

REQUIRED:

1. Calculate the labor efficiency planning variance and the labor efficiency operational variance.

(10 Marks)

1. Discuss with example (where possible), the possibility of having a learning curve that might change both of the variances in (A).

(5 Marks)

1. The EziClean Bhd makes environmentally-friendly soap using three basic ingredients. The standard cost card for one batch of soap for the month of August was as follows:

Material Kilograms Price per kilogram (RM)

Lye 025 10

Coconut oil 06 4

Shea butter 05 3

The budget for production and sales in August was 120,000 batches. Actual production and sales were 136,000 batches. The actual ingredients used were as follows:

Material Kilograms

Lye 34,080

Coconut oil 83,232

Shea butter 64,200

REQUIRED:

Calculate the total material mix variance and the total material yield variance for August.