ACCA PM Syllabus D. Budgeting And Control - Planning and Operational Variances for material & labour - Past Papers ^{2 / 4}

The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is with the Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the same school uniform.

After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is 10% more material than the previous style of dress required. However, a new material has also been chosen by the GPST which costs only $2·85 per metre which is 5% cheaper than the material used on the previous dresses. In February, the total amount of material used and purchased at this price was 54,560 metres.

The design of the new dresses has meant that a complicated new sewing technique needed to be used. Consequently, all staff required training before they could begin production. The manager of the sewing department expected each of the new dresses to take 10 minutes to make as compared to 8 minutes per dress for the old style. SU Co has 24 staff, each of whom works 160 hours per month and is paid a wage of $12 per hour. All staff worked all of their contracted hours in February on production of the GPST dresses and there was no idle time. No labour rate variance arose in February.

Activity levels for February were as follows:
Budgeted production and sales (units)        30,000
Actual production and sales (units)              24,000

The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co uses standard costing and usually, every time a design change takes place, the standard cost card is updated prior to production commencing. However, the company accountant responsible for updating the standards has been off sick for the last two months. Consequently, the standard cost card for the new dress has not yet been updated.

Required:
(a) Calculate the material variances in as much detail as the information allows for the month of February. (7 marks)

PlasBas Co uses recycled plastic to manufacture shopping baskets for local retailers.

The standard price of the recycled plastic is $0·50 per kg and standard usage of recycled plastic is 0·2 kg for each basket.

The budgeted production was 80,000 baskets.

Due to recent government incentives to encourage recycling, the standard price of recycled plastic was expected to reduce to $0·40 per kg.

The actual price paid by the company was $0·42 per kg and 100,000 baskets were manufactured using 20,000 kg of recycled plastic.

What is the materials operational price variance?

A    $2,000 favourable
B    $1,600 favourable
C    $400 adverse
D    $320 adverse

The following scenario relates to questions 21–25.

Corfe Co is a business which manufactures computer laptop batteries and it has developed a new battery which has a longer usage time than batteries currently available in laptops. The selling price of the battery is forecast to be $45.

The maximum production capacity of Corfe Co is 262,500 units. The company’s management accountant is currently preparing an annual flexible budget and has collected the following information so far:

In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is $35,000.

The production manager does not understand why the flexible budgets have been produced as he has always used a fixed budget previously.

The management accountant has said that a machine maintenance cost was not included in the flexible budget but needs to be taken into account.

The new battery will be manufactured on a machine currently owned by Corfe Co which was previously used for a product which has now been discontinued. The management accountant estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and maintenance costs for the machine for the last four years have been as follows:

22. What is the estimated maintenance cost if production of the battery is 80% of maximum capacity (to the nearest $’000)?

A    $575,000
B    $593,000
C    $500,000
D    $735,000

Notes
(1) The budgeted total sales volume for TVs was 1,180 units, consisting of an equal mix of plasma screen TVs and LCD screen TVs. Actual sales volume was 750 plasma TVs and 650 LCD TVs. Standard sales prices are $350 per unit for the plasma TVs and $300 per unit for the LCD TVs. The actual sales prices achieved during November were $330 per unit for plasma TVs and $290 per unit for LCD TVs. The standard contributions for plasma TVs and LCD TVs are $190 and $180 per unit respectively.

(2) The sole reason for this variance was an increase in the purchase price of one of its key components, X. Each plasma TV made and each LCD TV made requires one unit of component X, for which Carad Co’s standard cost is $60 per unit. Due to a shortage of components in the market place, the market price for November went up to $85 per unit for X. Carad Co actually paid $80 per unit for it.

(3) Each plasma TV uses 2 standard hours of labour and each LCD TV uses 1·5 standard hours of labour. The standard cost for labour is $14 per hour and this also reflects the actual cost per labour hour for the company’s permanent staff in November. However, because of the increase in sales and production volumes in November, the company also had to use additional temporary labour at the higher cost of $18 per hour. The total capacity of Carad’s permanent workforce is 2,200 hours production per month, assuming full efficiency. In the month of November, the permanent workforce were wholly efficient, taking exactly 2 hours to complete each plasma TV and exactly 1·5 hours to produce each LCD TV. The total labour variance therefore relates solely to the temporary workers, who took twice as long as the permanent workers to complete their production.

Required:
(b) Explain the reasons why Carad Co would be interested in the material price planning variance and the material price operational variance. (9 marks)

Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The standard cost of labour for each pair is $42 and the standard labour time for each pair is three hours.

In the last quarter, Glove Co had budgeted production of 12,000 pairs, although actual production was 12,600 pairs in order to meet demand.

37,000 hours were used to complete the work and there was no idle time. The total labour cost for the quarter was $531,930.

At the beginning of the last quarter, the design of the gloves was changed slightly. The new design required workers to sew the company’s logo on to the back of every glove made and the estimated time to do this was 15 minutes for each pair.

However, no-one told the accountant responsible for updating standard costs that the standard time per pair of gloves needed to be changed.

Similarly, although all workers were given a 2% pay rise at the beginning of the last quarter, the accountant was not told about this either. Consequently, the standard was not updated to reflect these changes.

When overtime is required, workers are paid 25% more than their usual hourly rate.

Required:
(b) Analyse the above total variances into component parts for planning and operational variances in as much detail as the information allows. (6 marks)

Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer.

All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer.

The standard cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour.

In November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work and there was no idle time.

All workers were paid for their actual hours worked.

The actual total labour cost for November was $136,800. The production manager at Truffle Co has no input into the budgeting process.

At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting a 5% pay cut or facing a certain number of redundancies.

All staff subsequently agreed to accept at 5% pay cut with immediate effect.

At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented immediately and made the chocolates more difficult to shape.

When recipe changes such as these are made, it takes time before the workers become used to working with the new ingredient mix, making the process 20% slower for at least the first month of the new operation.

The standard costing system is only updated once a year in June and no changes are ever made to the system outside of this.

Required:

(8 marks)

Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer.

All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer.

The standard cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour.

In November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work and there was no idle time.

All workers were paid for their actual hours worked.

The actual total labour cost for November was $136,800. The production manager at Truffle Co has no input into the budgeting process.

At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting a 5% pay cut or facing a certain number of redundancies.

All staff subsequently agreed to accept at 5% pay cut with immediate effect.

At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented immediately and made the chocolates more difficult to shape.

When recipe changes such as these are made, it takes time before the workers become used to working with the new ingredient mix, making the process 20% slower for at least the first month of the new operation.

The standard costing system is only updated once a year in June and no changes are ever made to the system outside of this.

Required:

(7 marks)