Question 1

Bokco 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 minimise inventory holding costs. Bokco 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 labour costs. Departmental managers are then paid a monthly bonus depending on the performance of their department.

One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to include a cost of $84 for labour, based on seven hours of labour at $12 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 totalled 1,860 hours at a total cost of $26,040.

After being presented with some initial variance calculations, the production manager has realised that the standard time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have been anticipated for the first 1,000 units of production. He has consequently been criticised by other departmental managers who have said that, 'He has no idea of all the problems this has caused.'

Required:

(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance AFTER taking account of the learning effect.

Note: The learning index for a 90% learning curve is -01520 (10 marks)

(b) Discuss the likely consequences arising from the production manager's failure to take into account the learning effect before production commenced. (5 marks)

(10 marks)

Question 2

The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard cost card for one batch of soap for the month of September was as follows:

Material Kilograms Price per kilogram ($)

Lye 025 10

Coconut oil 06 4

Shea butter05 3

The budget for production and sales in September 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:

(a) Calculate the total material mix variance and the total material yield variance for September. (10 marks)