Question

Super Star also manufactures and sells Galaxy in the market, and the following information relates to the actual selling price and actual cost of the product for the four weeks to 31 March 2014:

£000
Sales (50,000 units) 2,250
Direct materials (240,000 metres) 528
Direct labour (250,000 hours) 1,375
Variable production overhead 245
Fixed production overhead 650
2,798
Loss (548)
Super Luggage Management Accountant estimated budgeted selling price and standard cost of each unit was as follows:
£
Selling price 55
Direct materials (5 metres) 10
Direct labour (4 hours) 20
Variable production overhead 5
Fixed production overhead 15
50
Budgeted profit 5
Total budgeted production: 40,000 units.
Calculate variances, identify possible causes and recommend corrective action. Prepare an operating statement reconciling budgeted and actual results

Answer 1

Direct materials, labor, and variable overhead show favorable variances, contributing to an overall favorable production cost variance. Despite this, a significant unfavorable total production cost variance highlights potential cost overruns requiring investigation and corrective actions. Actual profit is £298,000 lower than the budgeted £250,000.

To calculate the variances, let's start with the direct materials, direct labor, and variable production overhead variances:

1. Direct Materials Variance:

- Actual cost: £528,000

- Standard cost: £10 × 240,000 meters = £2,400,000

- Variance: £2,400,000 - £528,000 = £1,872,000 (Favorable)

2. Direct Labor Variance:

- Actual cost: £1,375,000

- Standard cost: £20 × 250,000 hours = £5,000,000

- Variance: £5,000,000 - £1,375,000 = £3,625,000 (Favorable)

3. Variable Production Overhead Variance:

- Actual cost: £245,000

- Standard cost: £5 × 250,000 hours = £1,250,000

- Variance: £1,250,000 - £245,000 = £1,005,000 (Favorable)

Now, calculate the total production cost variance:

- Total Actual Cost: £2,798,000

- Total Standard Cost: £10 (Direct materials) + £20 (Direct labor) + £5 (Variable overhead) = £35

- Budgeted production: 40,000 units

- Total Standard Cost: £35 × 40,000 units = £1,400,000

4. Total Production Cost Variance:

- Variance: £1,400,000 - £2,798,000 = £1,398,000 (Unfavorable)

Now, prepare an operating statement reconciling budgeted and actual results:

- Actual Sales: £2,250,000

- Budgeted Profit: £5 × 50,000 units = £250,000

- Actual Profit: £250,000 - £548,000 (Loss) = £(298,000)

Reconciliation Operating Statement:

- Actual Sales: £2,250,000

- Actual Production Cost: £2,798,000

- Actual Profit/Loss: £(298,000)

Recommendations:

- Investigate the favorable variances in direct materials, direct labor, and variable overhead to understand the reasons for efficiency.

- Analyze the unfavorable total production cost variance to identify areas of cost overruns and take corrective actions.

- Consider a review of the budgeted production quantity to align with actual demand and reduce excess costs.