Since the outbreak of COVID-19 in January, wearing a mask has become essential for every Hong Kong residents. The surge in demand for masks has led to a group of local manufacturers setting up their own mask production lines with new production facilities. HK Mask Production Ltd, one of the manufacturers, has invested one million dollars to develop and produce masks with Nanotechnology. Production lines altogether are expected to supply 1.2 million masks every month. The masks will be individually packed in a box of 50 pieces. The expected selling price for one box of masks is $240. The company uses a standard costing system, with cost per box of masks given in the table below: Standard Cost Direct materials, 220 grams of fabric at $0.5/gram $110.0/box Direct labour, 36 minutes at $60/hour $36.0/box Variable manufacturing overhead, 36 minutes at $48/hour $28.8/box The following additional information is available for the month just completed: 1. The company manufactured 24,300 boxes of masks during the month. 2. All masks have been sold and earned a total revenue of $5,953,500. 3. A total of 4,860 kg of material was purchased during the month at a cost of $0.65 per gram. All of this material was used to manufacture the 24,300 boxes. There was no beginning or ending inventories for the month 4. The company worked 9,720 direct labour-hours during the month at a direct labour cost of $72 per hour. 5. The budgeted fixed manufacturing overhead for the month was $720,000. Fixed manufacturing overhead cost is applied to work in process with the predetermined overhead rate per box produced based on the expected production level. 6. Variable manufacturing overhead is applied to products on the basis of standard direct labour-hours. 7. Data relating to manufacturing overhead costs follow: Actual variable manufacturing overhead $369,360 Actual fixed manufacturing overhead $724,000 Required: (a) Determine the following variances, and state clearly whether each is favourable or unfavourable: (i) direct materials price, and quantity variances; (ii) direct labour rate and efficiency variances, variable overhead rate and efficiency variances; (iv) fixed overhead budget and volume variances; and (v) sales price and sales volume variances. (15 marks) (iii) (b) Assume the company expanded its production lines to produce children-sized masks. 300 boxes of the total production were children-sized masks. All children-sized masks have been sold at $300 per box. This led to an increase in sales for the month. Explain conceptually how the addition of this new product affected the sales price and volume variance that you calculated in (a)(v) above, and the overall total sales variance. Assume the manufacturers intend to continue selling this children-sized masks next month. Are the variances you calculated in (a)(v) likely to be sustained in the following month? (3 marks) (c) Suggest three possible causes of an unfavourable labour efficiency variance. (3 marks) (d) Which variance do you think is more important for control of fixed overhead costs between the spending variance and the volume variance? Explain. (4 marks)
