Question 6 (Standard Costing)

Cleanco Ltd operates in Sussex and manufactures a range of organic hand cleaners for use in local industries. One of its hand cleaners, GreenClean, is made in 100 kilogram batches. Standard inputs and yield for GreenClean for the 2018 financial year are as follows:

Material Kgs input Cost per Kg Total cost

Base 90 2.00 180.00

Cleaning agent 25 4.00 100.00

Perfumed Cream 10 20.00 200.00

125 3.84 480.00

Normal production loss (25)

Standard output (yield) 100 4.80

The demand for organic hand cleaners in Sussex is expected to rise, and Sarah Smart, Cleancos sales director, is keen to take advantage of this trend. However, GreenClean has not been able to grow its sales volumes in recent months, and Sarah feels that the products cleaning ability needs to be improved.

The production manager agrees with Sarah, although the production director is not keen to experiment with the GreenClean formula, which was developed at high cost by an industrial chemist.

In April 2018 Cleanco manufactured 1,025 kgs of GreenClean. Without saying anything to the production director, the production manager made certain changes to the standard inputs at the beginning of April.

Actual raw material usage and costs for April 2018 were as follows:

Material Kgs input Cost per Kg Total cost

Base 875 2.20 1,925.00

Cleaning agent 275 6.50 1,787.50

Perfumed cream 100 22.00 2,200.00

1,250 4.73 5,912.50

Actual production loss (225)

Actual output (yield) 1,025 5.77

In May of 2018 Cleanco sold all of its April production of GreenClean, at the budgeted price of 9.60 per kg. The total market for hand cleaners in Sussex stood at 18,000 kgs in May, compared to a total of 17,000 kgs per month for the first four months of the year. Cleanco budgeted to hold a 5% share of the Sussex market in 2018, budgeting to sell 850 kgs of hand cleaner per month throughout 2018.

Required:

1. Calculate the Material Price, Mix and Yield variances for GreenClean for April 2018.
2. Calculate the Sales Price Variance, and the Market Share Variance and Market Size Variance for GreenClean for May 2018.
3. With reference to the variances you have calculated, and any other information provided to you in the question, explain how the changes made by the production manager in April may have influenced the GreenClean sales figures for May 2018.