QUESTION 1 STANDARD COSTING

A company makes 5000 litres plastic water tanks for a variety of commercial uses. The standards cost per unit of material, labor, and overhead are as follows:

Direct material: 80 kilograms @ $2 $160

Direct labor: 1.25 hours @ $16 per hour $20

Variable overhead: 30 minutes of machine time @ $50.00 per hour $25

Fixed overhead: 30 minutes of machine time @ $40.00 per hour $20

The overhead application rates were developed using a practical capacity of 6,000 units per year. Production is assumed to occur evenly throughout the year.

During February 2016, the company produced 525 tanks. Actual data for February 2016 are as follows:

Direct material purchased: 46,000 kilograms @ $1.92 per kilogram

Direct material used: 43,050 kilograms (all from Mays purchases) Total labor cost: $10, 988.25 for 682.5 hours

Variable overhead incurred: $13, 770 for 270 hours of machine time

Fixed overhead incurred: $10, 600 for 270 hours of machine time

Required:

Calculate the following:

a. Material price variance based on purchases. 2 marks

b. Material quantity variance. 2 marks

c. Labor rate variance. 3 marks

d. Labor efficiency variance. 3 marks

e. Variable overhead spending and efficiency variances. 5 marks

f. Fixed overhead spending and volume variances. 4 marks

g. Overhead price variance. 3 marks

h. Overhead volume variance. 3 marks

i. Explain in detail why a marginal costing approach to variance analysis is more appropriate in environment such as that of this company. 5 marks

QUESTION 2 CAPITAL INVESTMENT APPRAISAL

ABC Company is a successful biscuit manufacturer. Since it was established five years ago it has gradually increased its range of plain and cheese biscuits. The sales director has now come to the board with a proposal to expand the range further into chocolate coated biscuits. This will involve the purchase of new machinery; the initial outlay will be $135 000. The finance director and the sales director meet to discuss sales projections for the new range of chocolate biscuits. They forecast the following net cash inflows over the five year period until the machinery will need to be replaced:

$

Year 1 35 000

Year 2 47 000

Year 3 52 000

Year 4 55 000

Year 5 55 000

In addition to these inflows, it is expected that the machinery will be sold for scrap at the end of year five for $10 000. The companys policy is to depreciate machinery on the straight-line basis over its estimated useful economic life. The cost of capital (i.e. the required rate of return) is 10% and the expected rate of return is zero.

Required:

a) Calculate the Net Present Value (NPV) for the investment project and provide advice on the investment prospect. 10 marks

b) Calculate the Internal Rate of Return and advice accordingly 10 marks