Question
The Ebonie Manufacturing Company's costing system has two direct cost categories: direct materials and direct manufacturing labour. Manufacturing overhead (both variable and fixed) is allocated
The Ebonie Manufacturing Company's costing system has two direct cost categories: direct materials and direct manufacturing labour. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of standard direct manufacturing labour-hours (DLH). At the beginning of 2022/2023, Ebonie adopted the following standards for its manufacturing costs:
Standards | Input | Cost per Output Unit | |||||
Direct Materials | 3.00 | kg at | $ | 5.00 | per kg | $ | 15.00 |
Direct Manufacturing Labour | 5.00 | hrs at | $ | 15.00 | per hr | $ | 75.00 |
Manufacturing Overhead | |||||||
Variable | $ | 6.00 | per DLH | $ | 30.00 | ||
Fixed | $ | 8.00 | per DLH | $ | 40.00 | ||
Standard Manufacturing Cost per Unit | $ | 160.00 | |||||
The denominator level for total manufacturing overhead per month in 2022/2023 is 40,000 direct manufacturing labour-hours. Ebonie Manufacturing's flexible budget for January 2023 was based on this denominator level. The records for January indicated the following:
Actual Costs | ||||||
Direct Materials Purchased | 25,000.00 | kg | $ | 5.20 | per kg | |
Direct Materials Used | 23,100.00 | kg | ||||
Direct Manufacturing Labour | 40,100.00 | Hours | $ | 14.60 | per hr | |
Total Actual Manufacturing Overhead (Variable & Fixed) | $ | 600,000.00 | ||||
Actual Production | 7,800.00 | Output Units |
Required
- Construct a schedule of total standard manufacturing costs for the 7800 output units in January.
- For the month of January 2023, calculate the following variances, indicating whether each is favourable (F) or unfavourable (U), in good format with workings:
a/ Direct materials price variance, based on purchases
b/ Direct materials efficiency variance
c/ Direct manufacturing labour price variance
d/ Direct manufacturing labour efficiency variance
e/ Total manufacturing overhead spending variance
f/ Variable manufacturing overhead efficiency variance
g/ Production-volume variance.
3 | Discuss at least 2 possible reasons for each of the above variances. |
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4 | Explain the importance of performing variance analysis as part of the management accounting function? |
5 | Explain how management will use the results of this variance analysis. |
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