question B

QUESTION 2 "Muscat Ovens' is a manufacturing business based in Muscat that makes Basic Kitchen ovens for households and more complex Industrial ovens that it sells to restaurants and hotels across Oman. The standard cost data (and volumes) for both products is detailed below: Basic Industrial Total Sales and Production Volume 15,000 5,000 Kgs of Material Used 10 45 Machine Hours per Unit 10 50 Labour Hours per Unit 2 2 Selling Price per Unit 350 450 Muscat ovens currently uses an absorption costing system based on labour hours. Material costs are 6 per kg and labour is paid 25 per direct labour hour. In addition to those costs, manufacturing overhead costs for the year are expected to total 1,200,000. (b) Explain why the two costing systems have yielded different results and which of the two costing systems should be used by the business based on the nature of the operation. Word Count 240 words (6 marks) C) performance evaluation: The performance of the firm is evaluated based on flexible budget variances The selling price of the firm is below the budgeted selling price. Hence, the sales revenue variance is unfavorable The material and labour cost are favorable compared to the standard cost allowed for actual units sold The overall contribution margin is unfavorable due to higher unfavorable sales revenue compared to favorable variable cost variance In terms of fixed overheads, the firm has saved 60,000 compared to the budgeted fixed overheads The overall variance is favorable due to which the actual operating profit is higher by 36,000