Question B1 Hotwells Fabric Ltd has recently introduced a new product, FC (short for Face Covering with Comfort and Cleanliness). Production is highly automated apart from packing, and it is assumed that variable overhead is derived on the basis of machine hours. The company has produced the following standard cost card for a batch of 100 boxes: Batch size 100 boxes Fabric [80 m @ 9.50 /m] Cardboard box (100 boxes @ 0.50/box] Labour (1 labour hour @ 12 1 hour] Variable overhead [2 machine hours @ 5 /hour] Fixed Overhead per batch Total absorption cost per batch 760.00 50.00 12.00 10.00 250.00 1,082.00 The company budgeted to produce and sell 200 batches per month. Actual results for the first 6 months in the life of the product are: Total number produced 1,100 batches Fabric 89,500 m 805,500 Cardboard box 110,000 boxes 60,500 Labour 1,000 labour hours 13,000 Variable overhead 2,300 machine hours 11,270 Fixed Overhead 290,000 REQUIRED (a) Using variance analysis reconcile the budget cost and actual cost for the six month period. (11 marks) At the end of the six-month period, the managers were asked to explain the variances and it was revealed that, due to major problems with the new machines, the workforce had been unable to work for 20 labour hours during the first two weeks of the period. They were paid for this time at the actual rate. In addition, it was decided that the cost standard of Fabric had been produced using out of date assumptions. With hindsight the cost standard should have been: 81 m @ 9.20 /m2 745.20 REQUIRED (6) Restate the labour variances to take account of idle time. (3 marks) (c) Using the above information split the variances regarding Fabric into their planning and operational components. (d) (3 marks) Discuss whether standards should be revised with hindsight when bonuses are awarded based on variances from standard. (8 marks) Total 25 marks Question B1 Hotwells Fabric Ltd has recently introduced a new product, FC (short for Face Covering with Comfort and Cleanliness). Production is highly automated apart from packing, and it is assumed that variable overhead is derived on the basis of machine hours. The company has produced the following standard cost card for a batch of 100 boxes: Batch size 100 boxes Fabric [80 m @ 9.50 /m] Cardboard box (100 boxes @ 0.50/box] Labour (1 labour hour @ 12 1 hour] Variable overhead [2 machine hours @ 5 /hour] Fixed Overhead per batch Total absorption cost per batch 760.00 50.00 12.00 10.00 250.00 1,082.00 The company budgeted to produce and sell 200 batches per month. Actual results for the first 6 months in the life of the product are: Total number produced 1,100 batches Fabric 89,500 m 805,500 Cardboard box 110,000 boxes 60,500 Labour 1,000 labour hours 13,000 Variable overhead 2,300 machine hours 11,270 Fixed Overhead 290,000 REQUIRED (a) Using variance analysis reconcile the budget cost and actual cost for the six month period. (11 marks) At the end of the six-month period, the managers were asked to explain the variances and it was revealed that, due to major problems with the new machines, the workforce had been unable to work for 20 labour hours during the first two weeks of the period. They were paid for this time at the actual rate. In addition, it was decided that the cost standard of Fabric had been produced using out of date assumptions. With hindsight the cost standard should have been: 81 m @ 9.20 /m2 745.20 REQUIRED (6) Restate the labour variances to take account of idle time. (3 marks) (c) Using the above information split the variances regarding Fabric into their planning and operational components. (d) (3 marks) Discuss whether standards should be revised with hindsight when bonuses are awarded based on variances from standard. (8 marks) Total 25 marks
