Question 1

Cannes Inc. produces and sells a single product. The company uses standard costing for accounting purposes. The standard cost for the product is as follows:

Standard Cost Data			Standard Cost Per Unit
Direct material	2 metres at $6.45 per metre		$12.90
Direct labour	1.4	DLH at $12 per DLH	$16.80
Variable overhead	1.4	DLH at $2.50 per DLH	$3.50
Fixed overhead	1.4	DLH at $6 per DLH	$8.40
			$41.60

For the year just completed, the company manufactured 30,000 units of products during the year. 1,000 of the 30,000 units produced did not pass inspection at the end of the manufacturing process. However, the production manager decided to consider this as normal spoilage and included the costs as part of cost of good units produced. A total of 64,000 metre of material was purchased during the year at a cost of $6.55 per metre. All of this material was used to manufacture the 30,000 units. There is no beginning or ending inventories for the year. The company worked 43,500 direct labour hours (DLH) during the year at a direct labour cost of $11.80 per hour. Overhead is applied to products based on DLH. The data relating to manufacturing overhead costs is as follows:

Budgeted activity level	35,000 units
Budgeted fixed overhead costs	$294,000
Actual variable overhead costs incurred	$108,000
Actual fixed overhead costs incurred	$311,800

Cannes Inc. has the policy of paying its staff a bonus if they meet the budgeted sales or cost targets. Cost targets are defined as cost variances that are within 5.0% of standard costs for the year.

At the year-end meeting, the production manager was eager to claim that the overall manufacturing cost variance is only 4.8% of the standard cost of products manufactured during the year, and that his staff should be in line for a bonus this year. The CEO, however, disagrees. By the CEOs computation, summation of all manufacturing cost variances works out to be 8.1% of the total standard cost of products manufactured.

Required:

1. Based on 30,000 units produced, compute the material price and quantity variances for the year.

(2 marks)

2. Based on 30,000 units produced, compute the labour rate and efficiency variances for the year.

(2 marks)

3. Based on 30,000 units produced, compute (i) the variable manufacturing overhead spending and efficiency variances; and (ii) the fixed overhead budget and volume variances for the year.

(5 marks)

4. Write journal entries to record all direct material, direct labour, and factory overhead variances for Cannes Inc. during the year (narrations are not required).

(10 marks)

5. Explain, by showing clear computations, how the production manager and CEO came up with their respective cost variance percentages of 4.8% and 8.1%. In addition, explain (with clear supporting computations) if you recommend that bonuses be paid for achievement of cost targets at Cannes Inc. this year.

(17 marks)