Question Six

A company manufactures two types of fertilizer (FA and FB).The company uses a standardcostingsystemforplanningandcontrolpurposes.Standardsaresetannuallybutbudgetsandvariancereportsarepreparedeachperiod.

Chemicals

Three chemicals (C1, C2 and C3) are used to make the fertilizers.C2 and C3 can be inputdirectly to the manufacturing process but C1 has to be treated before it can be used.Thetreatment results in a loss of 30% of the chemicals treated. There are no further losses in themanufacturingprocess.

Detailsofthestandards forthechemicalsareasfollows:

	C1	C2	C3
Priceperkg	RM8	RM15	RM12
Treatmentloss	30%
Contentoffinishedproduct:
perunitofFA	020kg	015kg	Nil
perunitofFB	020kg	Nil	025kg

InventoryPolicies

Chemicals:endofperiodholdingsmustbeequalto50%ofthefollowingperiodsrequirements.

TreatedC1isusedimmediately.ThereareneveranyinventoriesoftreatedC1atthestartorendofanyperiod.

Fertilizers:nofinishedproductsaretobeheld.

Period1OutputandSales

	Budget	Actual
FA	40,000units	38,000units
FB	24,000units	25,000units

Periods2and3SalesBudgets

	Period2	Period3
FA	40,000units	44,000units
FB	24,000units	33,000units

Required:

(a) DuringPeriod1,thequantityofC1usedwas17,740kg.CalculateforPeriod1forC1:

1. thematerialsusagevarianceforthewholeprocess
2. thetreatmentlosspercentage

(6marks)

(b) In Period 1, the company purchased and used 6,450 kg of C3. The cost of thispurchase was $94,000. It has now been realised that the standard price of C3shouldhavebeen$1450perkgforPeriod1.

1. Calculatetheplanningvariance,andtheoperationalpriceandusagevariancesforC3forPeriod1.

(7marks)

2. Explaintwoproblemsassociatedwiththereportingofplanningvariances.

(3marks)

(c) PreparethePurchases Budgetfor C2forPeriod 2.

(5 marks)

(d) Variance analysis presents results after the actual events have taken place andtherefore it is of little use to management for planning and control purposes,particularlyinamodernmanufacturingenvironment.

Discusstheabovestatement.

(9marks)