Question

You oversee the production facility of CC Compounders Ltd. CC Compounders Ltd manufactures compound which is being used in various extrusion processes. You are preparing for a management meeting. One of the points on the agenda is the explanation of the variance between actual production cost and standard production cost and to decide on action plans to address the reasons for the variance.

The following is the standard cost per 1 ton of compound:

	Per Unit	Price	Standard Cost per ton (R)
Material: AC1032 Powder	175kg	R 3.75/kg	656.25
Labour
Mixing Department	1.5 Hours	R125/hour	187.50
Overheads: Overheads are allocated based on actual labour hours.		175.00/hour	262.50
Total standard cost per unit			1,106.25

Budgeted fixed costs amounts to R175,000 per month.

The cost clerk provided you with the following actual information for the month.

Per Unit			Price	Total cost
Material: AC1032 Powder	185		R3.50/kg	809,375
Labour		2	R126.50/hour	316,250
Overheads				365,219
Fixed Costs				169,000

Production for the month was 1,250 units of compound.

Required:

Usestnardcostarancenalsistoanalseandeplaintenatrngarance. (Showallour calculations smetodarksare engarded)(18)

Ietytetoostimportntarasoraaeentoocuson.Spportour suestion ith refrnce o te releant arance n ont .(2)

Answer 1

1) material variances:
MPV=	(3.5 -3.75)*(809375/3.5)	57812 F
MQV=	(1250*175 - (809375/3.5))*3.75	46875 U

2) labor variances:
LRV=	(126.50 -125)*(316250/126.50)	3750U
LEV=	(1250*1.5 - (316250/126.50))*125	78125U

3) Overhead variances:
OHRV=	(146.09 -175)*(316250/126.50)	72275F
OHEV=	(1250*1.5 - (316250/126.50))*175	109375U

4)FCV=

169000 - 175000

6000F

Part 2)

The two most important areas for management to focus on:

a) Labor components, both the rate and the usage

b) Overhead components, both the rate and the usage of labor.

This is because the Rate and Efficiency variances under both labor and overheads are Unfaourable.