This document provides a detailed explanation of standard costing and variance analysis. It covers topics such as material and labor variances, overhead cost rates, and responsibility centers. The document also discusses the purpose and benefits of standard costing in cost control and inventory management.
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UGB 106
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TABLE OF CONTENTS MAIN BODY..................................................................................................................................3 QUESTION 2..................................................................................................................................3 (a).................................................................................................................................................3 (b).................................................................................................................................................3 (c).................................................................................................................................................3 (d).................................................................................................................................................3 (e).................................................................................................................................................4 (f).................................................................................................................................................4 QUESTION 3..................................................................................................................................5 (a).................................................................................................................................................5 (b).................................................................................................................................................6 (c).................................................................................................................................................6 QUESTION 4..................................................................................................................................7 (a) Columnar statement of budgets and variances.......................................................................7 (b).................................................................................................................................................7 (c).................................................................................................................................................8 REFERENCES................................................................................................................................9
MAIN BODY QUESTION 2 (a) Contribution: Total sales of 10,000 hand bags sold at £ 6 per unit = 10000 * £ 6 = £ 60000 - Variable cost at £ 0.45 per unit = 10000 * 4.5 = (£ 4500) Contribution = £ 60000 - £ 4500 =£55500 (b) Number of selling units required to achieve breakeven at sales price of £ 6: Break even units = Fixed costs / (Sales price per unit – variable costs per unit) = £ 27800 + £ 21000 / (£ 6 - £ 0.45) = £ 48800 / £ 5.55 =£ 8793 units approximately (c) Sales from the 20000 units sold = 20000 * £ 6 = £ 120000 ParticularsPer unit amountTotal revenue Sales20000 * £ 6£ 120000 Variable cost20000 * £ 0.45£ 9000 Contribution20000 * £ 5.55£ 111000 Total Fixed cost£ 48800 Profit£ 62200 Hence the profit if 20000 units of handbags are sold at the rate of£ 6 per unit then the total profit earned would be £ 62200. (d) If company wants to earn a profit of£ 30000, then the number of bags that they need to sell at the price of £ 6 per unit are: Targeted units = Fixed cost + Targeted income / contribution margin per unit (i.e. sales - variable cost) Targeted units = ( £ 48800 + £ 30000) / (£ 6 - £ 0.45) Targeted units = ( £ 48800 + £ 30000) / £ 5.55 3
Targeted units =£ 78800 / £ 5.55 Targeted units = 14198 units approximately needs to be sold in order to gain £ 30000 as the profit level. (e) Targeted amount and units are given but targeted sales price needs to be determined. The target units are 17000 handbags and the target sale amount is£ 30000. The selling price in such case should be: 17000 = £ 48800 + £ 30000 / ( x - £ 0.45) 17000 = £ 78800 / x - £ 0.45 X – 0.45 = £ 78800 / 17000 units X - 0.45 = 4.64 X = £ 5.09 i.e. the selling price should be quoted at £ 5.09 in order to earn the amount of £ 30000 by selling 17000 units. (f) The strategy can be evaluated in following manner: ParticularsPer unit amountTotal revenue Sales10800 * £ 6.1866744 Variable cost10800 * £ 0.454860 Contribution10800 * £ 5.7361884 Total Fixed cost48800 Advertising11000 Profit2084 The original profits that the company was earning at the sale of 10000 units at the rate of £ 6 every year: ParticularsPer unit amountTotal revenue Sales10000 * £ 6£ 60000 Variable cost10000 * £ 0.45£ 4500 Contribution10000 * £ 5.55£ 55500 Total Fixed cost£ 48800 4
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Profit£ 6700 Theanalysisabovehelpsinclearlyunderstandingthattheadditionalincurrenceofthe advertising costs and the increase in the total sales s well as the sales per unit will only lead to sever downfall in the profits ultimately and hence, it can be said that this decision of the management is not very wise (Kumar, 2019). They should stick to the current strategy and try to increase the total sales or the sales per unit by other measures rather than increasing the cost along with it. QUESTION 3 (a) The calculation of the overhead cost rate can be ascertained in following manner for the John Lee Plc: ParticularsTotalAssembly Dept.Joinery Dept.Canteen Indirect Labour2800013440112003360 Indirect Material22000149607040 Heating and Lighting 13000487565001625 Rent Rates14000525070001750 Depreciation19000102158172613 Supervision15000720060001800 Power900045003900600 Total12000060440498129748 The overhead cost rate for both the departments has been identified in the table above where it has been identified that for the assembly department the cost incurred is 60440 and for the joinery department it is 49812. Now the overhead cost can be allocated in the basis of labour hours. This can be done in following manner: Overhead cost rate based on labour rate = Overhead costs/ labour rate * 100 For assembly department: 60440 / 2100 * 100 = 28% approx For the joinery department: 49812 / 1400 * 100 = 36% approx 5
(b) In order to produce the one unit of Unique stool, there are 4 hours required from the assembly department is 4 hours and that form the joinery department is 6 hours. Now the total production cost of the 10 unique stools can be identified as follows: In Assembly department: Labour costing / labour hours * number of hours worked = 28000 / 3500 * 4 =£ 32 cost in assembly department for every unit. In Joinery department: 28000 / 3500 * 6 =£ 48 in joinery department The total cost therefore on every product is£ 32 + £ 48 + £ 85 = £ 165 per unit. Then the total cost of producing 10 units f the unique stool would be £ 165 * 10 i.e. £ 1650. (c) It is elementary in the costing of the products and services that are being produced so that the operational mangers are aware of the different standards that have been set based on the different activities that are to be performed in the organisation (Kristensen, 2020). In order to complete this task effectively, there are certain measures that can be taken by the organisation collectively where the creation of responsible centres is one such evident tactic that can be used by the organizations and they can hence the costs that are being incurred. The responsibility centres are basically different segments of the overall business which are responsible for some particular activities or different costs that are incurred and are kept segregated from each other so that the individual field of costing that is being utilised in the manufacturing of the product collectively can be identified separately (Paul, 2020). Expense centreis one such centre where the company identifies only those fields on which expense has been made i.e. the maintenance department, the accounting department or the production department can set expense as one of their responsibility centre. Theprofit centreis the one where the manager are responsible for bridging up the different between the cost and revenue incurred and ascertain the overall profit levels that the company is able to target has been achieved. This is solely related to the objective of profit maximisation. The nextand thethird aspectistheinvestmentcentre(Pagare, 2020). Settingthis responsibly centre helps in the better source of revenue generation for the company so that the overall income and returns can be increased. These are solely focused in ascertain the reaction of external and internal investors that the company should encourage and engage in. thus helps the company in managing their finances in a better manner. 6
QUESTION 4 (a) Columnar statement of budgets and variances ParticularsOriginalFlexedActualVariance Favorable/ Unfavorable Total production1000090009000 Direct Material600000540000579500(39500)Unfavorable Direct Labour450000405000451400(46400)Unfavorable Variable manufacturing overhead1200001080001060002000Favorable fixed manufacturing overhead200000200000202000(2000)Unfavorable Total137000012530001338900 (b) The two major variances above i.e. the labour and the material variance can be further broken down into some very specific categories of these variances (Nathwani, 2020). Thematerial variancecan be further categorised as: Purchase Price variance: The purchase price variance indicates the difference that occurs between the standard price of purchase of material that was set earlier and the actual cost per unit that is in actually incurred by the company. Standard price – actual price * actual quantity £ 3 - £ 3.05 * 9000 = 450 = Favorable Material Yield Variance: This variance indicates the variance or difference that arises between the usages of the material i.e. the quantity that was estimated to be used and the quantity that was actually used in the production (Cooper, 2017). The variance in context of Krishphil Limited can be identified as: Standard quantity – actual Quantity * standard price 200000 – 190000 * 3 = 30000 = Favourable Then comes the labour variance aspect of variance calculation and this can be further categorised into: 7
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Labour rate variance: The labour rate variance signifies the difference that occurred in the standard rate that has been set for the labour that will be working in the organisation and the actual workplace as well (Kumar, 2019). This can be ascertained as: Standard rate – Actual Rate * actual hours where the employee worked. £ 15 – £ 14.8 * 30500 = 6100 = Favorable LabourEfficiencyrate:Thelabourefficiencyvarianceisbasicallytheanalysisofthe productivity ad the output of the employees by aiming towards the minimisation of the labour houses requested. This can be done in following manner: Standard rate * Standard hours – actual hours: £ 15 * 30000 – 30500 = (7500) = Adverse (c) The purpose of standard costing is to ascertain the cists that will be incurred and the revenue that can be generated in prior to their actual incurrence (Tsai, Lan and Huang, 2019). This helps in setting up the standards for the different practices of the employees that can be used in order to generate the maximum performance and the increased efficiency of the different activities that are undertaken but without compromising on the quality levels and also avoiding incurrence of any wastage in the resources. The benefits of the standard costing include the various numbers of aspects that are undertaken into consideration such as: Improvement in the overall cost control The collection of more reasonable and better inventory measurements. Easy basis of comparison that is provides between the actual and the standard. 8
REFERENCES Books and Journals Cooper, R., 2017.Target costing and value engineering. Routledge. Kristensen, T.B., 2020. Enabling use of standard variable costing in lean production.Production Planning & Control, pp.1-16. Kumar, A., 2019. Standard Costing and Labour Cost Variance.The Management Accountant Journal.54(10). pp.65-73. Kumar, A., 2019. Standard Costing And Material Cost Variance.The Management Accountant Journal.54(1). pp.82-85. Nathwani, D., 2020. Standard Costing. Pagare, S., 2020. Standard Costing. Paul,D.D.,2020.STANDARDCOSTINGANDABC:ACOEXISTENCE.Strategic Finance.101(11). pp.32-39. Tsai, W.H., Lan, S.H. and Huang, C.T., 2019. Activity-Based Standard Costing Product-Mix Decision in the Future Digital Era: Green Recycling Steel-Scrap Material for Steel Industry.Sustainability.11(3). p.899. 9