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 8 PBA4807 MAY/JUNE 2018 PORTFOLIO EXAMINATION [TURN OVER] Production for the month was 1,250 units of compound. Required: 1. Use standard cost variance analysis to analyse and explain the manufacturing variance. (Show all your calculations as method marks are being awarded) (18) 2. Identify the two most important areas for management to focus on. Support your suggestion with reference to the relevant variance in point 1. (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.