unit 33 activities

8/7/2019 Unit 33 activities

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W O R K B O O K A C T I V I T I E S

CHAPTER 1: MANAGEMENT INFORMATION

1.1 Useful information satisfies the following criteria:

Relevant to the user the information must relate to the purpose for which it is required.

Understandable the information must be clear, concise, well-presented and free from unnecessary jargon.Explanations of the implications of numerical information should be easy to understand.

Timely information must be produced in time for it to be acted upon.

Consistent where comparisons are being made, the figures being compared must have been prepared on aconsistent basis. The items included and the methods used must be the same in order to make meaningfulcomparisons.

Sufficiently accurate for its purpose the appropriate level of accuracy of numerical information depends on thepurpose. For some purposes, thousands or even millions may be sufficiently accurate (e.g. comparing the annualturnover of large companies within a multi-national group). For other purposes, several decimal places may berequired (e.g. calculating the cost of a material per unit of a product). Unnecessary numerical accuracy makesinformation less clear.

1.2 (a) Cost driver rates:

Preparation: 375,000/750,000 = 0.50 per minute

Painting: 960,000/384,000 = 2.50 per minute

Storage: 510,000/255,000 = 2.00 per cubic metre

(b) Budgeted costs per unit are calculated using the cost driver rates above, for example: preparation per unit of X =8 minutes at 0.50 per minute = 8 x 0.50 = 4.00.

X () Y ()

Preparation 4.00 6.00

Painting 25.00 15.00

Storage 0.50 1.00

29.50 22.00

1.3 Delta Ltd

(a) Overhead absorption rate = Budgeted total overhead

Budgeted total direct labour hours

Working for Budgeted total direct labour hours:

Product A: 40,000 units at 0.5 hrs each 20,000

Product B: 30,000 units at 0.25 hrs each 7,500

Product C: 15,000 units at 0.125 each 1,875

Total budgeted direct labour hours 29,375

Therefore overhead absorption rate = 411,300 29,375 = 14.00 to 2 d. p.

(b) Absorption Costing: cost per product unit

Product A B C

Direct Material 25.00 30.00 16.00

Direct Labour 4.00 2.00 1.00

Total direct cost 29.00 32.00 17.00

Overheads at 14/hr 7.00 3.50 1.75

Total cost per unit 36.00 35.50 18.75

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(c) Workings for total budgeted demand for each cost driver:

Cost driver for production set-up is the number of batches. For each product:

Number of batches = total demand divided by batch size.

Number of batches of A = 40,000 2,500 = 16

Number of batches of B = 30,000 3,000 = 10

Number of batches of C = 15,000 1,000 = 15

Total number of batches = 16 + 10 + 15 = 41

Cost driver for raw materials inwards is the number of deliveries, which is given for each product.

Total number of deliveries = 10 + 6 + 10 = 26.

Cost driver for raw materials stores is the number of materials requisitions, which is given for each product.

Total number of requisitions = 16 + 20 + 30 = 66.

Using these answers, the cost driver rates are:

Production set-up: 246,000 41 = 6,000 per batch.

Raw materials inwards: 66,300 26 = 2,550 per delivery.

Raw materials stores: 99,000 66 = 1,500 per requisition.

(d) Total cost of production using Activity Based Costing

A B CBudgeted production (units) 40,000 30,000 15,000

Production set-up

6,000 x 16 96,000

6,000 x 10 60,000

6,000 x 15 90,000

Raw materials inwards

2,550 x 10 25,500

2,550 x 6 15,300

2,550 x 10 25,500

Raw materials stores

1,500 x 16 24,0001,500 x 20 30,000

1,500 x 30 45,000

Total overheads 145,500 105,300 160,500

(e) Activity Based Costing: cost per product unit

Product A B C

Direct Material 25.00 30.00 16.00

Direct Labour 4.00 2.00 1.00

Total direct cost 29.00 32.00 17.00

Overheads (*) 3.64 3.51 10.70

Total cost per unit 32.64 35.51 27.70

*Overheads are calculated by dividing the total in (d) above by the total demand in units of the product, e.g. for product AOverheads per unit = 145,500 40,000 = 3.64 to 2 d. p.

1.4 (a) Total variable costs for producing 10,000 Abmars are given. Dividing these by 10,000 gives the cost per unit:

Cost per Abmar using Marginal Costing:

Direct Materials 7.00

Direct Labour 4.00

Variable Production Overheads 3.00

Total Marginal cost 14.00

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(b) Abmar Ltd

Marginal Costing Statement for the year ended 30 June 2004

000s 000s

Sales 240

Less: Cost of Sales

Opening Stock

Production 140

Less closing stock* (28) 112

Total Contribution 128

Less: Fixed costs

Production Overheads 50

Other Overheads 60 110

Profit 18

*Closing stock of 2,000 Abmars are valued at marginal cost of 14 each.

(c) Fixed production overheads of 50,000 are to be absorbed on a per unit basis and budgeted production is 10,000Abmars. Therefore the absorption rate is 50,000 10,000 = 5 per Abmar.

Cost per Abmar using Absorption Costing:

Direct Materials 7.00

Direct Labour 4.00

Total direct cost 11.00

Variable Production Overheads 3.00

Fixed Production Overheads 5.00

Total Absorption cost 19.00

(d) Abmar Ltd

Absorption Costing Statement for the year ended 30 June 2004

000s 000s

Sales 240

Less: Cost of Sales

Opening Stock

Production 190

Less closing stock* (38) 152

88

Less: Fixed costs

Other overheads 60

Profit 28

*Closing stock of 2,000 Abmars are valued at absorption cost of 19 each.

(e)

Marginal costing reported profit = 18,000

Absorption costing reported profit = 28,000

Difference in reported profit = 10,000

The reason for the difference is that, in absorption costing, there is 5 of fixed overhead absorbed into each of the2,000 Abmars in the increase in stock. Therefore 2,000 x 5 = 10,000 of fixed overhead is carried forward to the nextperiod. In marginal costing, all the fixed costs are treated as period costs, making the reported profit lower in a periodwhen the stock level increases.

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1.5 Variable production cost per unit = (25 + 40 + 15) = 80

Absorption production cost per unit = (80 + 20) = 100

Budgeted total fixed production overhead = budgeted production units x fixed overhead absorbed per unit

= 1,500 x 20 = 30,000

In marginal costing, this is deducted in total from the contribution.

(a) Marginal Costing Absorption Costing

000s 000s 000s 000s

Sales 1,200 x 170 204 204

Less: Cost of Sales

Opening Stock - -

Production 120 150

Less Closing Stock (24) 96 (30) 120

Contribution 108

Gross Profit 84

Less Fixed Costs

Production overhead 30 -

Other overheads 50 80 50 50

Net Profit 28 34

Reconciliation of profit figures:

Increase in stock = 300 units

In absorption costing, fixed costs absorbed into the increase in stock = 300 x 20

= 6,000 more reported profit in the absorption costing statement.

(b) Marginal Costing Absorption Costing

000s 000s 000s 000s

Sales 1,200 x 170 204 204

Less: Cost of Sales

Opening Stock 24 30Production 80 100

Less Closing Stock (8) 96 (10) 120

Contribution 108

Gross Profit 84

Less Fixed Costs

Production overhead 30 -

Other overheads 50 80 50 50

Net Profit 28 34

Adjust for under absorption* (10)

Net Profit 24

*Only 1,000 units were produced, 500 less than the budgeted production. There is an under-absorption of fixedproduction overheads equal to 500 x 20. No adjustment was necessary in (a) because 1,500 units were producedas planned.

Reconciliation of profit figures:

Decrease in stock = 200 units

In absorption costing, fixed costs charged in the decrease in stock = 200 x 20

= 4,000 more reported profit in the marginal costing statement.

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1.6 (a) Sampling products to investigate faults is quicker and therefore cheaper than inspection of every unit of the product.For some products, testing every item is not possible, because the test involves destruction of the output, for examplefireworks.

(b) True (or simple) random sampling means that every item in the population has an equal chance of being selected.The population here is the output of Arnos. A random number generator may be used in the sampling process.

Systematic sampling means that every nth item is chosen, having started from a randomly chosen point. Forexample, the randomly chosen starting point may be the 7th item, and after that, say, each 15th item would betested.

Stratified sampling means that, where the population falls into a number of groups, the sample is chosen so that allthe groups are represented. Randomly chosen samples are taken in proportion to the relative sizes of the groups.

(c) Because the production manager would want to test a sample from the output of each production worker, stratifiedsampling should be used. Random samples of each workers output should be taken, in proportion to the output ofthe worker. (Other methods of sampling may happen to result in one workers output being left out of the sample).

1.7 (a) Average change in the trend per period = 987 931 = 11.2

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(b) Assuming an increase of 11.2 (000s) per period continues, the trend in sales volume will be:

Time period: 9 10 11 12

Trend (000s units) 998.2 1,009.4 1,020.6 1,031.8

1.8 (a) Data Three-point moving average trend

902

890 910.67

940 910.00

900 915.00

905 918.33

950

(b) Data Five-point moving average trend

74

77

70 75.2

75 76.2

80 77.2

79 78.0

82 80.0

74 82.0

85

90

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1.9 (a)

Year/Quarter Turnover 4-point 4-point Trend Seasonal

moving total moving average (centred) variation

000s 000s 000s 000s 000s

2004

Q3 482

Q4 560

2005 2,063 515.75

Q1 493 521 - 28

2,101 525.25

Q2 528 531 - 3

2,145 536.25

Q3 520 541 - 21

2,182 545.50

Q4 604 551 53

2006 2,225 556.25

Q1 530 561 - 31

2,263 565.75

Q2 571 571 0

2,301 575.25

Q3 558 580 - 22

2,341 585.25

Q4 642 590 52

2007 2,379 594.75

Q1 570

Q2 609

(c) Forecast

Q3 598 620

Q4 683 630

(b) Average seasonal variations in turnover:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

2005 - 28 - 3 - 21 53

2006 - 31 0 - 22 52

Total - 59 - 3 - 43 105

Average - 29.5 - 1.5 - 21.5 52.5 (Total = 0)

or (rounded) - 30 - 1 - 22 53 (Total = 0)

(c) Average change in trend = (590 521)/7 = 9.86 = 10 to the nearest whole number.

Increasing the trend by 10 per quarter gives 620 and 630 for the last two quarters of 2007. (Using 000s).

The forecast turnover figures are therefore as follows:

2007 Quarter 3: (620,000 22,000) = 598,000

2007 Quarter 4: (630,000 + 53,000) = 683,000

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1.10 (a)Year Quarter Sales volume Four-point Trend Seasonal

Average variation

2003 1 2,530

2 2,700

2,580

3 2,610 2,605.0 100.2%

2,6304 2,480 2,660.0 93.2%

2,690

2004 1 2,730 2,720.0 100.4%

2,750

2 2,940 2,767.5 106.2%

2,785

3 2,850 2,812.5 101.3%

2,840

4 2,620 2,860.0 91.6%

2,880

2005 1 2,950 2,905.0 101.5%2,930

2 3,100 2,955.0 104.9%

2,980

3 3,050

4 2,820

(b)

% Seasonal variations: Quarter 1 2 3 4

2003 100.2 93.2

2004 100.4 106.2 101.3 91.62005 101.5 104.9

Total 201.9 211.1 201.5 184.8

Average (to nearest whole %) 101% 106% 101% 92%

(c) Average change in trend per quarter = 2,955 2,605 = 50 units

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2006 Quarter Forecast trend Seasonal Forecast variation sales units

1 2,955 + 3 x 50 = 3,105 101% 3,136

2 2,955 + 4 x 50 = 3,155 106% 3,3443 2,955 + 5 x 50 = 3,205 101% 3,237

4 2,955 + 6 x 50 = 3,255 92% 2,995

1.11 (a) The regression line formula gives the following trend:

Quarter

17 8,000 x 17 + 150,000 = 286,000

18 8,000 x 18 + 150,000 = 294,000

19 8,000 x 19 + 150,000 = 302,000

20 8,000 x 20 + 150,000 = 310,000

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(b)(c) Applying the absolute seasonal variations for forecast (b) and the percentage seasonal variations for forecast (c)gives:

Quarter Trend (b) forecast (c) forecast

17 286,000 186,000 200,200

18 294,000 344,000 338,100

19 302,000 472,000 483,200

20 310,000 190,000 170,500

(d) Error in Error in Quarter Actual sales (b) forecast (c) forecast

17 185,000 1,000 15,200

18 345,500 1,500 7,400

19 471,600 400 11,600

20 189,000 1,000 18,500As the error calculations show, the forecasts (b) using the absolute variations are closer to the pattern of actual salesand therefore this is the preferred method.

(e) Using the absolute variations, as identified in (d):

Quarter Trend* Seasonal Forecast sales

Variation (number of films)21 318,000 100,000 218,000

22 326,000 +50,000 376,000

23 334,000 +170,000 504,000

24 342,000 120,000 222,000

*e.g. Trend for quarter 21 is 8,000 x 21 + 150,000

1.12 Index numbers

(a) 3 x 130 100 = 3.90

(b) 180,000 x 116 145 = 144,000

(c) Either compare 124 x 1.02 = 126.48 with 128, showing that a 2% increase is below inflation, or

compare 102 with 100 x 128 124 = 103.23, or

calculate the increase in the index as 4 x 100 124 = 3.23%.

Whichever method is used, the conclusion is that the workers are worse off in real terms.

(d) The average salaries in terms of Year 5 prices are:

Year 1 16,000 x 128 120 = 17,067

Year 2 16,300 x 128 122 = 17,102

Year 3 16,700 x 128 123 = 17,379

Year 4 17,000 x 128 126 = 17,270

Year 5 17,200

Comments: When the average salaries are put into comparable terms, it can be seen that Year 2 and Year 3 showincreases in real terms, but Year 4 and Year 5 do not. In other words, from Year 3 onwards, the salary increases havenot kept up with inflation (as measured by this index).

(e) The price of the material is 24.00 per kg and the index is 120. If the index is 125 in a years time, the forecast price= 24.00 x 125/120 = 25.00 per kg

The index actually rose to 122.

Therefore the forecast should have been 24.00 x 122/120 = 24.40 per kg

Error in forecast = 25.00 24.40 = 0.60 per kg (overestimated).

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CHAPTER 2: STANDARD COSTING DIRECT COSTS

2.1

(a) Standard cost of actual quantity of material used = 20,000 x 5.50 = 110,000

Actual cost of the actual quantity of material used = 98,000

Direct Material Price Variance = 110,000 98,000

= 12,000 Favourable

Standard material quantity for actual production level = 10,500 x 2 kg

= 21,000 kg

Direct Material Usage Variance

= standard price x (standard quantity actual quantity)

= 5.50 x (21,000 20,000) = 5.50 x 1,000 = 5,500 Favourable.

(The total direct material variance is therefore 17,500 Favourable. You could calculate this separately as a check.)

(b) From the budget total figures, we can calculate:

Standard material quantity per product unit = 4,500/1,500 = 3 metres

Standard price of material per metre = 5,400/4,500 = 1.20 per metre

Standard cost of actual quantity of material used = 5,400 x 1.20 = 6,480



= 1,520 Adverse

Standard material quantity for actual production level = 1,700 x 3 m

= 5,100 m



= 1.20 x (5,100 5,400) = 1.20 x ( 300) = 360 Adverse.

(The total direct material variance is therefore 1,880 Adverse. You could calculate this separately as a check.)

2.2

(a) Standard cost of actual labour hours used = 5,700 x 6.00 = 34,200

Actual cost of the actual labour hours used = 35,000

Direct Labour Rate Variance = 34,200 35,000

= 800 Adverse

Standard labour hours for actual production level = 10,500 x 0.5 hours

= 5,250 hoursDirect Labour Efficiency Variance

= standard rate x (standard hours actual hours)

= 6.00 x (5,250 5,700) = 6.00 x ( 450) = 2,700 Adverse.

(The total direct labour variance is therefore 3,500 Adverse. You could calculate this separately as a check.)

(b) From the budget total figures, we can calculate:

Standard labour hours per product unit = 3,000/1,500 = 2 hours

Standard rate per labour hour = 24,000/3,000 = 8.00 per hour

Standard cost of actual labour hours used = 3,500 x 8.00 = 28,000Actual cost of the actual labour hours used = 26,000


= 2,000 Favourable

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Standard labour hours for actual production level = 1,700 x 2 hours

= 3,400 hours

Direct Labour Efficiency Variance


= 8.00 x (3,400 3,500) = 8.00 x ( 100) = 800 Adverse.

(The total direct labour variance is therefore 1,200 Favourable. You could calculate this separately as a check.)

2.3

(a) Standard cost of actual quantity of material used = 10,000 x 16.00 = 160,000



= 5,400 Adverse

Standard material quantity for actual production level = 6,300 x 1.5 kg

= 9,450 kg.



= 16.00 x (9,450 10,000) = 16.00 x ( 550) = 8,800 Adverse.

(The total direct material variance is therefore 14,200 Adverse. You could calculate this separately as a check.)

(b) Standard cost of actual labour hours used = 25,200 x 7.00 = 176,400

Actual cost of the actual labour hours used = 180,000


= 3,600 Adverse

Standard labour hours for actual production level = 6,300 x 4 hours

= 25,200 hours

Direct Labour Efficiency Variance


= 7.00 x (25,200 25,200) = zero.

(The total direct labour variance is therefore 3,600 Adverse. You could calculate this separately as a check.)

(c) Possible reasons for the direct cost variances may include some of the following. (Note that, in a particular case study, youmay be given information that suggests the specific reasons that can be identified for the variances.)

Adverse Direct Material Price Variance:

standard did not allow for specific price increase or for general inflation

material obtained from a different supplier or on different terms

different quality of material

foreign currency exchange rate change

Adverse Direct Material Usage Variance:

poorly set or unrealistic standard

different quality or specification of material

new or poorly trained workers

Adverse Direct Labour Rate Variance

poorly set or unrealistic standard

standard did not allow for specific wage increase or for general inflation

different grade of staff

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2.4 (a) True.

(b) False the usage is calculated for actual output, so the usage variance may be favourable or adverse or zero.

(c) False the efficiency variance would be adverse in the case of slower working. Even if the total variance is adverse,the efficiency variance could be favourable.

(d) True.

(e) False the direct materials price variance and the direct labour rate variance would be likely to be adverse, but theusage and efficiency would not be affected.

(f) True both the price and yield may be different.

2.5 (a) Direct material:

Direct Material Price Variance =

Standard cost of the actual Actual cost of the actual

quantity of material used quantity of material used

20,000 kg @ 9.00 20,000 kg @ 8.80

= 180,000 176,000

Therefore Direct Material Price Variance = 4,000 Favourable

Alternatively, Actual Quantity x (Standard Price Actual Price)

gives 20,000 x (9.00 8.80) = 4,000 Favourable.

Direct Material Usage Variance =

Standard quantity of material Actual quantity of

for actual production at material used at

standard price standard price

7,620 x 2.5 kg x 9.00 20,000 x 9.00

= 171,450 180,000

Therefore Direct Material Usage Variance = 8,550 Adverse.

Alternatively, Standard price x (standard quantity actual quantity)

gives 9.00 x (7,620 x 2.5 20,000) = 9.00 x (950) = 8,550 Adverse.

Direct Material Total Variance could be calculated separately as a check.

(b) Direct labour: Actual hours = 16,500 6.60 = 2,500 hrs.

Direct Labour Rate Variance =

Standard cost of the actual Actual cost of the actual

labour hours used labour hours used

2,500 hrs @ 6.00 2,500 hrs @ 6.60= 15,000 16,500 (given)

Therefore Direct Labour Rate Variance = 1,500 Adverse

Alternatively, Actual Labour Hours x (Standard Rate Actual Rate)

gives 2,500 x (6.00 6.60) = 1,500 Adverse.

Direct Labour Efficiency Variance =Standard labour hours Actual labour hours

for actual production at used at

standard rate standard rate

7,620 x (20 60) x 6.00 2,500 x 6.00

= 15,240 15,000

Therefore Direct Labour Efficiency Variance = 240 Favourable.

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Alternatively, Standard rate x (standard hours actual hours)

gives 6.00 x (7,620 x 20 60 2,500) = 6.00 x 40 = 240 Favourable.

Direct Labour Total Variance could be calculated separately as a check.

(c)

Direct Cost Reconciliation Statement:

Standard Direct Cost of Production

7,620 x (9.00 x 2.5 + 6.00 x 20 60) 186,690

Favourable direct material price variance (4,000)

Adverse direct material usage variance 8,550

Adverse total direct material variance 4,550

Adverse direct labour rate variance 1,500

Favourable direct labour efficiency variance (240)

Adverse total direct labour variance 1,260

Actual cost of production of 7,620 units 192,500

(20,000 x 8.80) + 16,500

2.6 Varan Ltd: from the budgeted figures we obtain:

Standard quantity of material per product unit = 36,000 12,000 = 3 m

Standard price per metre of material = 223,200 36,000 = 6.20 per m

Cost of direct material per product unit = 6.20 x 3 = 18.60

Standard labour hours per product unit = 24,000 12,000 = 2 hours

Standard labour rate per hour = 115,200 24,000 = 4.80 per hour

Cost of direct labour per product unit = 4.80 x 2 = 9.60

Using these standards, the actual results and the methods given for 2.2 above, we have

Direct material price variance = 37,000 x 6.20 250,000 = 20,600 Adverse

Direct material usage variance = 12,300 x 3 x 6.20 37,000 x 6.20

Or alternatively 6.20 x (12,300 x 3 37,000) = 620 Adverse

Direct labour rate variance = 25,000 x 4.80 122,500 = 2,500 Adverse

Direct labour efficiency variance = 12,300 x 2 x 4.80 25,000 x 4.80

Or alternatively 4.80 x (12,300 x 2 25,000) = 1,920 Adverse

Varan Ltd Direct Cost Reconciliation Statement

for 3 months production of 12,300 units


12,300 x (18.60 + 9.60) 346,860

Adverse direct material price variance 20,600

Adverse direct material usage variance 620



Adverse direct labour efficiency variance 1,920


Actual Direct Cost of Production of 12,300 units 372,500

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2.7 Margan Ltd using variable costs of material and labour:

Standard quantity of material per product unit = 10,625 8,500 = 1.25 kg

Standard price per kg of material = 63,750 10,625 = 6.00 per kg

Cost of variable material per product unit = 6.00 x 1.25 = 7.50

Standard Grade I labour hours per product unit = 4,250 8,500 = 0.5 hours

Standard Grade I labour rate per hour = 35,700 4,250 = 8.40 per hour

Cost of Grade I variable labour per product unit = 8.40 x 0.5 = 4.20

Standard Grade II labour hours per product unit = 6,375 8,500 = 0.75 hours

Standard Grade II labour rate per hour = 51,000 6,375 = 8.00 per hour

Cost of Grade II variable labour per product unit = 8.00 x 0.75 = 6.00

Using these standards, the actual results and the methods given for 2.5 above:

Variable material price variance = 10,100 x 6.00 63,630 = 3,030 Adverse

Variable material usage variance = 8,200 x 1.25 x 6.00 10,100 x 6.00

Or alternatively 6.00 x (8,200 x 1.25 10,100) = 900 Favourable

Variable Grade I labour rate variance = 4,000 x 8.40 34,000 = 400 Adverse

Variable Grade I labour efficiency variance = 8,200 x 0.5 x 8.40 4,000 x 8.40

Or alternatively 8.40 x (8,200 x 0.5 4,000) = 840 Favourable

Variable Grade II labour rate variance = 6,300 x 8.00 50,400 = zero

Variable Grade II labour efficiency variance = 8,200 x 0.75 x 8.00 6,300 x 8.00

Or alternatively 8.00 x (8,200 x 0.75 6,300) 1,200 Adverse

Margan Ltd Marginal Cost Reconciliation Statement

for November production of 8,200 units

Standard Marginal Cost of Production

8,200 x (7.50 + 4.20 + 6.00) 145,140

Adverse variable material price variance 3,030

Favourable variable material usage variance (900)

Adverse total variable material variance 2,130

Adverse variable Grade I labour rate variance 400

Fav. variable Grade I labour efficiency variance (840)

Favourable total variable Grade I labour variance (440)

Zero variable Grade II labour rate variance

Adv. variable Grade II labour efficiency variance 1,200Adverse total variable Grade II labour variance 1,200

Actual marginal cost of production of 8,200 units 148,030

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2.8 Rust Ltd

(a) Total standard direct cost = 9,000 x 15.20 = 136,800

(b) Total actual cost = 30,000 + 105,000 = 135,000

(c) Standard cost of direct materials for 9,000 Reks = 9,000 x 3.20 = 28,800

Actual cost (given) = 30,000

Therefore direct material total variance = 1,200 Adverse

Butusage variance is given as 800 Favourable.

Therefore direct material price variance = 1,200 + 800 = 2,000 Adverse

(Check that this makes total variance = 1,200 Adverse).

(d) Standard cost of direct labour for 9,000 Reks = 9,000 x 12 = 108,000

Actual cost (given) = 105,000

Therefore direct labour total variance = 3,000 Favourable

But efficiency variance is given as 4,000 Adverse.

Therefore direct labour rate variance = 7,000 Favourable

to make total variance = 3,000 Favourable

(e)

Rust Ltd Direct Cost Reconciliation Statement

for October 2004 production of 9,000 Reks


Answer (a) 136,800

Adverse direct material price variance (c) 2,000

Favourable direct material usage variance (800)Adverse total direct material variance (c) 1,200

Favourable direct labour rate variance (d) (7,000)


Favourable total direct labour variance (d) (3,000)

Actual cost of production of 9,000 Reks 135,000

Answer (b)

(f)1 Valid: machine breakdown could contribute to an adverse direct labour efficiency variance.

2 Valid: improved specification of the material could have contributed to a favourable usage variance and alsoan adverse price variance if the supplier also increased the price. It is possible that a difference in the materialcould affect labour efficiency if different working methods are required.

3 Does not appear to be valid: wastage of materials would give an adverse usage variance.

4 Does not appear to be valid: a wage increase would be expected to cause an adverse labour rate variance.

5 Valid: trainees would work more slowly than the standard and also probably have lower wages. This reasoncould have contributed to the favourable rate variance and the adverse efficiency variance.

6 Does not appear to be valid: efficiency was lower than standard.

7 Valid: a different supplier may charge a higher price, giving an adverse price variance. Usage and efficiencyvariances could also be affected as in (2) above.

8 Valid: a deliberate go-slow would contribute to an adverse labour efficiency variance. The labour rate was alsoshown to be lower than standard.

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2.9

(a) From the budget, we can calculate the standard cost of Product Zed:

Direct Material per unit of Zed = 7,200/1,200 = 6 kg

Standard price of direct material = 36,000/7,200 = 5 per kg

Direct Labour per unit of Zed = 8,400/1,200 = 7 hours

Standard rate for direct labour = 50,400/8,400 = 6 per hour.

Using the usual formulas, the variances are:

Total direct material variance = (1,400 x 6 x 5 42,640) = 640 A

Direct material price variance = (8,200 x 5 42,640) = 1,640 A

Direct material usage variance = 5 x (1,400 x 6 8,200) = 1,000 F

Total direct labour variance = (1,400 x 7 x 6 56,500) = 2,300 F

Direct labour rate variance = (9,400 x 6 56,500) = 100 A

Direct labour efficiency variance = 6 x (1,400 x 7 9,400) = 2,400 F

(b) Garth Ltd: reconciliation statement for Product Zed

Standard cost of 1,400 units

1,400 x (6 x 5 + 7 x 6) 100,800

Variances:

Direct material

Adverse price variance 1,640

Favourable usage variance (1,000) 640

Direct labour

Adverse rate variance 100

Favourable efficiency variance (2,400) (2,300)

Total actual costs 99,140

(42,640 + 56,500)

(c) MEMO

Date: today

To: The Manager of Garth Ltd

From: A StudentSubject: Variance report for Product Zed

The actual direct costs of making 1,400 units of Zed were less than the standard costs, as can be seen in the attachedreconciliation statement.

The direct material price was greater than the standard price. This was due (at least in part) to the purchase of somematerial from a local supplier at a higher price than usual. Our normal supplier may also have increased the price. Therewas a small adverse labour rate variance, which was probably caused by the inclusion of overtime premium in the directlabour cost. Both these adverse variances were therefore caused, at least partly, by the extra order from a customer,completed at short notice.

The favourable variances for material usage and labour efficiency may have been partly due to the batch of moreexpensive material, which could have been better quality and easier to work. It seems likely that there were other reasons

for these variances, as most of the material came from the normal supplier. The employees may have become moreskilled in the work since the standard was set and therefore waste less material and work more quickly than the standard.Alternatively, the standards for usage and efficiency may need updating.

Overall the favourable variances outweighed the adverse variances for this period.

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1 8

CHAPTER 3: STANDARD COSTING FIXED OVERHEADS

3.1 Total fixed overhead variance

= fixed overhead absorbed actual fixed overhead

= (10,500 x 0.5 x 8 50,000) = 8,000 A

Fixed overhead expenditure variance

= budgeted fixed overhead actual fixed overhead

= 48,000 50,000 = 2,000 A

Fixed overhead volume variance

= absorption rate x (actual output budgeted output) where the output is measured in standard hours

= 8 x (10,500 x 0.5 12,000 x 0.5) = 8 x (5,250 6,000)

= 6,000 A

Fixed overhead capacity variance

= absorption rate x (actual hours standard hours for budgeted output)

= 8 x (5,700 12,000 x 0.5)

= 2,400 A

Fixed overhead efficiency variance

= absorption rate x (standard hours for actual output actual hours)

= 8 x (10,500 x 0.5 5,700)

= 3,600 A

3.2 From the given information, we can calculate:

Budgeted total direct labour hours (standard hours for budgeted output)

= 1,500 units at 2 hours per unit = 3,000 hours

Total budgeted fixed overheads= 3,000 hours at 30 per hour = 90,000

Total fixed overhead variance

= fixed overhead absorbed actual fixed overhead

= (1,700 x 2 x 30 85,000) = 17,000 F

Fixed overhead expenditure variance

= budgeted fixed overhead actual fixed overhead

= 90,000 85,000 = 5,000 F

Fixed overhead volume variance

= absorption rate x (actual output budgeted output) where the output is measured in standard hours

= 30 x (1,700 x 2 1,500 x 2) = 30 x (3,400 3,000)

= 12,000 F

Fixed overhead capacity variance

= absorption rate x (actual hours standard hours for budgeted output)

= 30 x (3,500 3,000)

= 15,000 F

Fixed overhead efficiency variance

= absorption rate x (standard hours for actual output actual hours)

= 30 x (1,700 x 2 3,500)

= 3,000 A


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1 9

3.3 Margan Ltd

(a) Fixed cost (expenditure) variance

= Total Budgeted Fixed Cost Actual Fixed Cost

= 90,100 85,000

= 5,100 Favourable.

(b) In marginal costing, there is no further analysis of the fixed cost variance, because fixed costs are not included in the

cost of the work done. Fixed costs are charged in total in the time period to which they belong and are not linked to thevolume of output, or to time taken. Therefore variances based on differences in volume or in time taken do not arise.

3.4 (a) Fixed overhead variance analysis


= Fixed overhead absorbed Actual cost of fixed overhead

= 7,620 x 12.60 x 20 60 33,000

= 32,004 33,000

= 996 Adverse.

Fixed overhead Expenditure variance

= Budgeted cost of fixed overheads Actual cost of fixed overheads

= 7,800 x 12.60 x 20 60 33,000

= 32,760 33,000

= 240 Adverse.

Fixed overhead Capacity variance

= Absorption rate x (Actual hours taken Standard hours for Budgeted Output)

= 12.60 x (2,500 7,800 x 20 60)

= 12.60 x (2,500 2,600)

= 1,260 Adverse.

Fixed overhead Efficiency variance

= Absorption rate x (Standard hours for Actual output Actual hours taken)

= 12.60 x (7,620 x 20 60 2,500)

= 12.60 x (2,540 2,500)

= 504 Favourable

Fixed overhead Volume variance

= Absorption rate x (Std hrs for actual output Std hrs for Budgeted output)

= 12.60 x (2,540 2,600)

= 756 Adverse

Summary: Fixed overhead capacity variance 1,260 A

Fixed overhead efficiency variance 504 F

Fixed overhead volume variance 756 A

Fixed overhead expenditure variance 240 AFixed overhead total variance 996 A


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(b)

1 False. Production output was less than planned, and in any case a different volume does not cause theefficiency variance.

2 True. Planned capacity = 2,600 hours and Actual capacity = 2,500 hours. The difference of 100 hours adverseis the reason for the capacity variance.

3 False. Fixed overheads are under-absorbed. The amount absorbed = 32,004 and this is less than the actualoverheads of 33,000.

4 True. 40 hours less were used. (2,500 instead of 2,540).

5 False. Expenditure was 240 more than the budget.

3.5 Varan Ltd

(a) Fixed production overhead absorption rate = 14,400 18,000

= 0.80 per machine hour.

(b) Standard machine time per product unit = 18,000 12,000 = 1.5 hours.

1.5 hours at 0.80 per machine hour absorption rate = 1.20 per unit.

(c) As in solution to activity 2.6:

Direct material price variance = 37,000 x 6.20 250,000 = 20,600 Adverse

Direct material usage variance = 12,300 x 3 x 6.20 37,000 x 6.20

Or alternatively 6.20 x (12,300 x 3 37,000) = 620 Adverse

Direct labour rate variance = 25,000 x 4.80 122,500 = 2,500 Adverse

Direct labour efficiency variance = 12,300 x 2 x 4.80 25,000 x 4.80

Or alternatively 4.80 x (12,300 x 2 25,000) = 1,920 Adverse

(d) Total fixed overhead variance


= 12,300 x 1.20 16,000

= 14,760 16,000

= 1,240 Adverse



= 14,400 16,000

= 1,600 Adverse


= Absorption rate x (Actual hours taken Standard hours for Budgeted Output)

= 0.80 x (18,500 18,000)

= 400 Favourable


= Absorption rate x (Standard hours for Actual output Actual hours taken)

= 0.80 x (12,300 x 1.5 18,500)= 0.80 x (18,450 18,500)

= 40 Adverse

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= Absorption rate x (Std hrs for actual output Std hrs for Budgeted output)

= 0.80 x (18,450 18,000)

= 360 Favourable.

(e) Varan Ltd Cost Reconciliation Statement for 3 months production of 12,300 units

Standard Cost of Production

12,300 x (18.60 + 9.60 + 1.20) 361,620

Adverse direct material price variance 20,600

Adverse direct material usage variance 620





Adverse fixed overhead expenditure variance 1,600

Favourable fixed overhead capacity variance (400)

Adverse fixed overhead efficiency variance 40 1,240

(Volume variance 360 F)

Actual Cost of Production of 12,300 units 388,500

(f)

1 Valid. Output was 300 units more than planned, giving a favourable volume variance.

2 Valid. This could have contributed to the adverse material price and usage variances and possibly the adverselabour efficiency variance.

3 Valid. Output took 50 hours more machine time than the standard, giving an adverse fixed overhead efficiencyvariance. The machine breakdown may also have contributed to the adverse labour efficiency variance.

4 Valid. This could have contributed to the adverse labour rate variance.

5 Valid. The staff covering may have been less familiar with the work, contributing to the adverse labourefficiency variance. Depending on whether they were treated as direct or indirect, the overtime premiumpayments may have contributed to the labour rate variance or the fixed overhead expenditure variance.

6 Does not appear to be valid as the labour efficiency variance was adverse.

7 Does not appear to be valid as the material usage and the labour efficiency variances are both adverse.

3.6 (a) Standard absorption cost per holiday, using budget for 6,000 holidays:

Accommodation (variable cost) 840,000/6,000 = 140

Air transport (fixed cost) 720,000/6,000 = 120

Standard absorption cost per holiday 260

(b) Standard absorption cost for 7,800 holidays = 260 x 7,800 = 2,028,000

(c) Material price variance for accommodation = (140 x 7,800 1,048,944) = 43,056 F

Fixed overhead variances for air transport: notice that in this case, the units of output are holidays and the resource

linked to output in setting the standards is the number of flights. Assuming 75 tourists per flight in the standard meansthat:

75 x 120 = 9,000 of air transport cost is absorbed into each flight.

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Expenditure variance is the difference between budgeted and actual total cost:

Expenditure variance = 720,000 - 792,000 = 72,000 A

Volume variance is based on the difference in the number of holidays:

Volume variance = 120 x (7,800 6,000) = 216,000 F

Capacity variance is based on the difference in the number of flights:

Capacity variance = 9,000 x (78 80) = 18,000 A

Efficiency variance is based on the difference in the number of passengers per flight. Actual number of passengers

per flight = 7,800/78 = 100. The budget was based on 75 passengers per flight.

Efficiency variance = 120 x (100 75) x 78 = 234,000 F

Alternatively, corresponding to the usual formula, this can be calculated as:

Absorption rate per flight x (standard flights for actual holidays actual flights)

= 9,000 x (7,800/75 78) = 234,000 F

(d) Island Holidays Ltd Reconciliation Statement for Quarter 3, 2004

Standard absorption cost for 7,800 holidays 2,028,000

Variances:

Accommodation price variance (F) (43,056)

Air transport expenditure variance (A) 72,000

Air transport capacity variance (A) 18,000

Air transport efficiency variance (F) (234,000) (187,056)

Actual Cost (1,048,944 + 792,000) 1,840,944

(d) Actual cost per holiday = 1,840,944/7,800 = 236

The most important reason why the actual cost per holiday is lower than the standard absorption cost per holiday is

the air transport efficiency variance. This results from the fact that the aircraft were used more efficiently, the averagenumber of passengers per flight being significantly higher than that on which the standard costs were based.

3.7 Image Dry Cleaners

(a) The output of Image Dry Cleaners consists of items which have been cleaned. It is measured in standard form in termsof the number of machine runs. The standard machine run corresponds to cleaning 15 items.

The fixed overhead absorption rate per machine run =

6,160 budgeted number of machine runs per week.

Budgeted number of machine runs per week = 4 x (5 x 4 + 2) = 88.

Therefore the fixed overhead absorption rate =

6,160 88 = 70 per machine run.

(b) Fixed overhead variances for Image Dry Cleaners for the week commencing 10 September 2004:

Firstly, identify the actual output in terms of standard machine runs ie divide the number of items cleaned by thestandard machine load of 15 items:

1,260 15 = 84 standard machine runs of output.



= 84 standard runs x 70 6,010

= 5,880 6,010

= 130 Adverse

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= 6,160 6,010

= 150 Favourable


= Absorption rate x (Actual machine runs Budgeted Output in standard runs)

= 70 x (82 88)

= 420 Adverse


= Absorption Rate x (Actual output in standard runs Actual machine runs)

= 70 x (84 82)

= 140 Favourable


= Absorption rate x (Actual output in std runs Budgeted output in std runs)

= 70 x (84 88)

= 280 Adverse

(c)

REPORT

To: The Manager

From: A Student

Date: September 2004

Subject: Fixed overhead variances for the week commencing 10 September 2004

Summary: Fixed overhead capacity variance 420 AFixed overhead efficiency variance 140 F

Fixed overhead volume variance 280 A

Fixed overhead expenditure variance 150 F

Fixed overhead total variance 130 A

Comments:

The total actual machine runs in the four shops was 82 for the week, which is 6 less than the budget. This is thereason for the capacity variance. It shows that the machines are being under used compared with budget.

The average number of items per machine run during the week was slightly above the standard of 15 items (itwas 1,260 82 = 15.4). This gives a favourable efficiency variance, because it is more efficient to run themachines with bigger loads. This could still be improved if the machines were run fully loaded more often.

The volume variance is the total of the capacity and efficiency variances. It shows that the number of itemscleaned was less than the budget. The budget is based on 88 x 15 = 1,320 items. 1,260 items were cleanedduring the week, which is 60 less than planned.

The favourable expenditure variance shows that spending on fixed overheads for the week was 150 less thanthe budget.

You should find the analysis of these variances useful in the planning and control of the business. It shows thatthe total adverse variance was not caused by over-spending or inefficiency, compared with the budget, but dueto having less items to clean. However, this particular week may not be typical, and the variances should bestudied for a number of weeks to see whether there is an adverse trend in volumes of cleaning.

In summary, the situation could be improved by cleaning more items and using the machines more fully loaded.There is plenty of spare machine capacity in the shops as the budget is well below full capacity.

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3.8 (a) Fixed cost absorption rate, based on the number of visitors

= 8,400 2,400 = 3.50 per visitor.

(b) Total fixed cost variance

= Fixed cost absorbed Actual fixed cost

= 2,550 x 3.5 8,670

= 8,925 8,670

= 255 Favourable

This is made up of two parts:

Fixed cost Expenditure variance

= Budgeted cost Actual cost

= 8,400 8,670

= 270 Adverse

This has arisen because spending was higher than the budget.


= Absorption rate x (Actual output in visitors Budgeted output)

= 3.50 x (2,550 2,400)

= 525 Favourable.

This has arisen because more visitors came to the museum than budgeted.

As the volume variance is greater, the total variance is favourable.

(c) The Village Museum has no way of measuring output other than the number of visitors. The number of visitors is theoutput, because it is relevant to the revenue received. Output cannot be measured in terms of time, as the time visitorsspend in the museum makes no difference. There is therefore no link between a particular resource and output of themuseum, which means that capacity and efficiency variances cannot be calculated.

3.9 (a) Standard cost per litre of direct material = 8,100/4,500 = 1.80

Standard cost per direct labour hour = 32,400/6,000 = 5.40

Fixed overhead absorption rate = 28,000/20,000 = 1.40 per customer visit

(b) Variances for Riviera Swimming Pool, quarter 2, 2004:

Direct material price variance = (4,620 x 1.80 8,300) = 16 F

Direct labour rate variance = (5,900 x 5.40 32,450) = 590 A

Fixed overhead expenditure variance = (28,000 30,000) = 2,000 A

Fixed overhead volume variance = 1.40 x (20,000 18,600) = 1,960 A

(c) The fixed overhead volume variance cannot be split into capacity and efficiency variances, because the pool outputis measured in terms of the number of customer visits (on which ticket sales depend). There is no link between aparticular resource, such as labour time, and the output measured in this way: changes in the number of customervisits make no difference to the resources needed to keep the pool open.

CHAPTER 4: STANDARD COSTING FURTHER ANALYSIS

4.1 (a) In relation to standard costing:

Ideal standard: a standard set at a level which makes no allowance for losses and is only attainable under themost favourable conditions. The effect would be to report adverse variances so often that managers wouldcome to expect them, and would concentrate only on the larger variances. Also in planning, they mayinformally add to their resource requirements. Both these actions are in effect operating a different standardfrom the ideal, and different managers may do this differently, causing inconsistency in planning and control.

Attainable standard: a standard set at a level that assumes efficient levels of operation, but includesallowances for normal loss, waste and machine downtime. The effect should be to report a mixture offavourable and adverse variances, showing where the attainable standard has been achieved or not. Adversevariances should highlight abnormal losses and wastage.

Basic standard: a standard set some time ago which can be used to identify trends or develop other standards.

The effect of using this as the basis for variance analysis would probably be to report large variances, whichmay be meaningless if the basic standard is out of date and does not relate to current conditions. Basicstandards may be used along with variance analysis based on more up-to-date standards, to obtain a longerterm view of changes which have occurred.

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The most appropriate standard for the purposes of variance analysis is an attainable standard, as can be seen fromthe points made above. An attainable standard can be used as a target, which is achievable under normal conditions.It is therefore more useful for both planning and control purposes. Variances calculated are more meaningful than withideal or basic standards, as they will occur only when there are abnormal conditions or when there is a change in whatis achievable.

(b) control limits: when considering whether variances should be investigated, control limits may be set to define howlarge a variance should be to justify investigation. Control limits may be set above and below the standard, interms of absolute amounts or percentages of the standard. They may be applicable to individual variances or tocumulative variances.

management by exception: the use of exception reporting to help concentrate management efforts on significantissues. Exception reporting in variance analysis means only reporting variances which are outside the agreedacceptable range around the standard. Control limits may be used to define this range.

(c) The method of costing being used will determine what is included in the calculation of a particular variance and themanager responsible will concentrate on those items. The level at which the standard is set can also affect behaviour,as discussed in part (a). You may have given one of many examples, which include (one required):

if a manager is held responsible for direct labour variances, but overtime premium is treated as an overhead, therewill be no incentive to control the use of overtime

a manager who is held responsible for direct material usage may achieve favourable variances by reducing theamount of direct material and this may affect the quality of the product. (There would be no incentive to control

the use of materials treated as indirect.) a manager who is held responsible for direct labour efficiency may encourage employees to work faster and this

may affect the quality of the product

managers who participate in the standard setting process may overestimate the materials usage and labour timerequired, in order to make it easier to meet the standards

4.2 (a) Actual price per litre = 54,000 18,000 = 3.00

Seasonally adjusted standard price (January) = 3.20 0.10 = 3.10

Original price variance = Actual quantity x (Standard price Actual price)

= 18,000 x (3.20 3.00) = 3,600 FPrice variance due to seasonality = Actual quantity x (Standard price Seasonally adjusted standard price)

= 18,000 x (3.20 3.10) = 1,800 F

Price variance due to other influences = Actual quantity x (Seasonally adjusted standard price Actual price)

= 18,000 x (3.10 3.00) = 1,800 F

(b) Actual price per litre = 58,140 18,000 = 3.23

Seasonally adjusted standard price (May) = 3.20 + 0.05 = 3.25


= 18,000 x (3.20 3.23) = 540 A

Price variance due to seasonality = Actual quantity x (Standard price Seasonally adjusted standard price)

= 18,000 x (3.20 3.25) = 900 A


= 18,000 x (3.25 3.23) = 360 F

4.3 (a) Actual price per metre = 124,800 6,400 = 19.50

Seasonally adjusted standard price (May) = 20.00 x 105% = 21.00


= 6,400 x (20.00 19.50) = 3,200 F


= 6,400 x (20.00 21.00) = 6,400 A


= 6,400 x (21.00 19.50) = 9,600 F

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(b) Actual price per metre = 105,000 7,000 = 15.00

Seasonally adjusted standard price (Sept) = 20.00 x 80% = 16.00


= 7,000 x (20.00 15.00) = 35,000 F


= 7,000 x (20.00 16.00) = 28,000 F


= 7,000 x (16.00 15.00) = 7,000 F

4.4 Actual price per unit = 350,900 5,800 = 60.50

Actual index adjusted standard price = 60.00 x 152 150 = 60.80


= 5,800 x (60.00 60.50) = 2,900 A

Price variance due to actual change in price index = Actual quantity x (Standard price Index adjusted standard price)

= 5,800 x (60.00 60.80) = 4,640 A

Price variance due to other factors = Actual quantity x (Index adjusted standard price Actual price)

= 5,800 x (60.80 60.50) = 1,740 F

4.5 Actual rate per hour = 79,056 10,800 = 7.32

Actual wage increase adjusted standard rate = 7.35 x (180 189) x 104% = 7.28

Original rate variance = Actual hours x (Standard rate Actual rate)

= 10,800 x (7.35 7.32) = 324 F

Rate variance due to actual wage increase = Actual hours x (Standard rate Wage increase adjusted standard rate)

= 10,800 x (7.35 7.28) = 756 F

Rate variance due to other factors = Actual hours x (Wage increase adjusted standard rate Actual rate)

= 10,800 x (7.28 7.32) = 432 A

4.6 (a) Standard price in B$ = B$180

Standard price adjusted for June exchange rate = 180 4.50 = 40.00

Actual price per unit = 307,500 7,500 = 41.00

Original standard price in = 36.00


= 7,500 x (36.00 41.00) = 37,500 A

Price variance due to exchange rate movements = Actual quantity x (Standard price Currency adjusted standard price)

= 7,500 x (36.00 40.00) = 30,000 A

Price variance due to other factors = Actual quantity x (Currency adjusted standard price Actual price)

= 7,500 x (40.00 41.00) = 7,500 A

(b) Standard price in B$ = B$180

Standard price adjusted for September exchange rate = 180 6 = 30.00


Original standard price in = 36.00


= 8,000 x (36.00 32.00) = 32,000 F


= 8,000 x (36.00 30.00) = 48,000 F


= 8,000 x (30.00 32.00) = 16,000 A

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4.7 (a) Standard price in G$ = G$1,200

Standard price adjusted for July exchange rate = 1,200 32 = 37.50

Actual price per unit = 35.00

Original Standard price in = 40.00


= 4,800 x (40.00 35.00) = 24,000 F


= 4,800 x (40.00 37.50) = 12,000 FPrice variance due to other factors = Actual quantity x (Currency adjusted standard price Actual price)

= 4,800 x (37.50 35.00) = 12,000 F

(b) Standard price in G$ = G$1,200

Standard price adjusted for November exchange rate = 1,200 25 = 48.00


Original Standard price in = 40.00


= 5,200 x (40.00 50.00) = 52,000 A

Price variance due to exchange rate movements = Actual quantity x (Standard price Currency adjusted standard price)= 5,200 x (40.00 48.00) = 41,600 A


= 5,200 x (48.00 50.00) = 10,400 A

4.8 (a) Direct material total variance = (4,500 x 10 48,000) = 3,000 A

Direct material price variance = (20,000 x 2.50 48,000) = 2,000 F

Direct material usage variance = 2.50 x (4,500 x 4 20,000) = 5,000 A

(b) Direct labour total variance = (4,500 x 9.30 40,000) = 1,850 F

Direct labour rate variance = (6,400 x 6.20 40,000) = 320 A

Direct labour efficiency variance = 6.20 x (4,500 x 1.5 6,400) = 2,170 F

(c) (i) The part of the direct material usage variance due to the standard being set at 4.0 kg per unit of UV instead of 4.2kg is:

standard price x (original standard usage adjusted standard usage)

= 2.50 x (4,500 x 4.0 4,500 x 4.2) = 2,250 A

The part due to other reasons is 2.50 x (4,500 x 4.2 20,000) = 2,750 A

(ii) The standard was previously set at 90% level of efficiency, giving 1.5 hours per unit of UV. This means that therequired standard time/1.5 = 90% and hence the required standard time at 100% level of efficiency is:

90% x 1.5 hours = 1.35 hours. Therefore the part of the direct labour efficiency variance due to the standard notbeing updated is:

standard rate x (original standard hours required standard hours)

= 6.20 x (4,500 x 1.5 4,500 x 1.35) = 4,185 F

The part due to other reasons = 6.20 x (4,500 x 1.35 6,400) = 2,015 A

4.9

(a) Direct material total variance = (16,000 x 56 920,160) = 24,160 A

Direct material price variance = (113,600 x 8 920,160) = 11,360 A

Direct material usage variance = 8 x (16,000 x 7 113,600) = 12,800 A

(b) Direct labour total variance = (16,000 x 20 336,336) = 16,336 A

Direct labour rate variance = (68,640 x 5 336,336) = 6,864 F

Direct labour efficiency variance = 5 x (16,000 x 4 68,640) = 23,200 A

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(c) (i) Standard price of material should have been 8 x 101.25% = 8.10

Therefore the part of the price variance due to the incorrect standard =

(8.00 8.10) x 113,600 = 11,360 A

The part of the price variance due to other reasons = (113,600 x 8.10 920,160) = zero.

(ii) Production workers are currently taking

68,640/16,000 = 4.29 hours per unit of W

and this is 110% of the time they will take when fully trained.Therefore the time they will take when fully trained is 4.29 x 100/110 = 3.9 hours per unit of W.

The part of the direct labour efficiency variance due to the workers not yet being fully trained =

5 x 16,000 x (3.90 4.29) = 31,200 A

The part due to other reasons = 5 x 16,000 x (4.00 3.90) = 8,000 F

4.10 (a) (i) actual litres of material used = 338,283/40.20 = 8,415 litres

(ii) actual hours worked = 110,330/5.90 = 18,700 hours

(iii) standard quantity of material for actual output = 1,700 x 5 = 8,500 litres

(iv) standard direct labour hours for actual output = 1,700 x 10 = 17,000 hours

(v) the total budgeted fixed overheads = fixed overheads for budgeted output

= 1,750 x 10 x 24 = 1,750 x 240 = 420,000

(b) (i) direct material price variance = (8,415 x 40 338,283) = 1,683 A

(ii) direct material usage variance = 40 x (8,500 8,415) = 3,400 F

(iii) direct labour rate variance = (18,700 x 6 110,330) = 1,870 F

(iv) direct labour efficiency variance = 6 x (17,000 18,700) = 10,200 A

(v) fixed overhead expenditure variance = 420,000 - 410,000 = 10,000 F

(vi) fixed overhead volume variance = 240 x (1,750 1,700) = 12,000 A

(vii) fixed overhead capacity variance = 24 x (17,500 18,700) = 28,800 F

(viii) fixed overhead efficiency variance = 24 x (17,000 18,700) = 40,800 A

(c) Brighter Chemicals Reconciliation Statement for May 2004

Standard absorption cost for 1,700 tins of XZ 850,000

Variances:

Direct material price variance (A) 1,683

Direct material usage variance (F) (3,400)

Direct labour rate variance (F) (1,870)

Direct labour efficiency variance (A) 10,200

Fixed overhead expenditure variance (F) (10,000)

Fixed overhead capacity variance (F) (28,800)

Fixed overhead efficiency variance (A) 40,800 8,613

Actual Cost (338,283 + 110,330 + 410,000) 858,613

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(d) MEMO

To: Production Director

From: A Student

Date: today

Subject: Variances for May 2004

1 There is a favourable direct material usage variance for the month. Certain factors may affect this, including (three

required):

the contents of the drums of material purchased may be more than the guaranteed minimum, so that the fullamount of usage is not actually recorded

the tins of output may contain slightly less than they should because the machine is not accurate, so that theusage of material for 1,700 tins is underestimated

the standard usage may have been set incorrectly

mistakes may have been made in recording quantities

2 It is important to investigate favourable variances, because, as can be seen above with material usage, they do notnecessarily represent favourable situations. If the variance is due to mistakes or inaccurate measuring, controlaction is needed.

3 The material price variance was caused partly by the standard being based on an underestimation of price

changes. The price index for May 2004 was 125.86, but the standard was based on an index of 124.00. Thestandard cost per litre should therefore have been:

40 x 125.86/124.00 = 40.60

The part of the price variance due to this change in the standard cost was:

8,415 x (40.00 - 40.60) = 5,049 A

The part of the price variance due to other reasons was:

8,415 x (40.60 - 40.20) = 3,366 F

CHAPTER 5: MEASURING QUALITY

5.1 (a) Possible aspects you may have suggested (only four asked for) include:

helpfulness of staff

staff knowledge of the products

lay-out of the department, ease of access

clarity of pricing

ease of finding required products and product information

availability of staff

waiting times at tills.

(b) Possible examples include:

Prevention costs: staff training, additional cost of more staff, store interior designers, cost of improving lay-

out, signs etc. Appraisal costs: the cost of preparing the questionnaire and analysing the results, cost of supervisors or

quality control staff to carry out observations.

Internal failure costs: the cost of investigating and putting right mistakes before customers are affected, forexample incorrect labelling or pricing of products

External failure costs: the cost of dealing with customer complaints, loss of potential sales due to poor service.

5.2 (a) The main implication of implementing a policy of Total Quality Management in an organisation is that it must becomethe philosophy of the whole organisation. Training and motivation of staff is essential, so that an attitude of seekingimprovement is encouraged. Everyone should be allowed to put forward ideas. Groups of employees may formquality circles and have regular meetings to discuss their ideas for quality improvements. The aim is to eliminatefaulty work and prevent mistakes. There are cost implications in the form of additional prevention and appraisal costs,

but the costs of internal and external failures should be reduced.

The benefits include the reduction of internal and external failure costs, which are caused by mistakes and poorquality work. The policy of TQM may also improve employees job satisfaction and motivation. It should also improvethe reputation of the organisation and customer goodwill. As a result it should lead to increased sales.

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(b) If customers cannot get through on the telephone to place orders, potential sales will be lost. To prevent this, anorganisation with TQM would look for ways of ensuring that orders can be placed easily: either by increasing thenumber of telephone lines or by offering alternatives such as ordering by e-mail.

If materials are wasted due to machine failures, an organisation with TQM would investigate the failures and try toprevent them in future: either by improving machine maintenance (and possibly staff training in using the machines)or by considering replacing the machines.

5.3 Smiths Wheels

(a) Wheels scrapped after machining = 2% x 40,000 = 800 wheels.

(b) After 800 wheels are scrapped, 39,200 remain, to be assembled into 19,600 pairs. Of these 4% are substandard.

Substandard assembled pairs of wheels = 4% x 19,600 = 784 pairs.

Three-quarters of these are scrapped, i.e. 0.75 x 784 = 588 pairs.

One quarter are sold, i.e. 0.25 x 784 = 196 pairs (substandard).

(c) The cost of scrapping 800 wheels after machining is the variable cost of making them, which is800 x 0.20 = 160.00.

The cost of scrapping 588 pairs of wheels is the variable cost of making them, which is 588 x 0.55 = 323.40

The cost of replacing 196 pairs of substandard wheels is the variable cost of making the replacements, which is196 x 0.55 = 107.80.

Therefore the total cost of faulty production is 160.00 + 323.40 + 107.80 = 591.20.

(d) Two further costs of quality which are not included in the above are the cost of the inspection process (appraisal cost)and the loss of future sales due to selling substandard goods (external failure cost).

5.4 White Ltd

(a) The features of the service which represent value to the customer can be seen from looking at the causes ofcomplaint. The value to the customer depends on:

Prompt delivery

High standard of cleanliness

Items in good condition

Correct number of items

(b) The problems identified at the meeting could be addressed by:

Using better quality washing liquid. This may cost more, but would reduce the failure costs of re-washing items.

Making sure the vans are serviced regularly. Any additional cost would be a prevention cost. The failure costresulting from breakdowns would be reduced.

Improving the system for obtaining hotels requirements, perhaps by offering fax or E-mail facilities so thatthere can be checks at both ends. This may not incur any additional costs, but if it did they would be preventioncosts.

Reviewing delivery routes to ensure that they are planned efficiently, to save time and fuel if possible. This maysave costs, but if any extra costs are incurred, they would be prevention costs.

Consider replacing out-dated equipment. New equipment should be more efficient and save running costs andthe failure costs of re-washing items or replacing damaged items.

Review the systems for inspecting and packing items so that inspection is thorough and counting is accurate.This may involve staff training or additional staff hours. The additional costs of training would be preventioncosts and the cost of more thorough inspection and checking would be appraisal costs.

5.5 Pix Ltd

Out of 75,000 cameras, 1 in every 1,500 is faulty, i.e. 50 are faulty. 80% of these are returned for repair. The repair costs 30.

Therefore, cost of repairs of faulty cameras = 80% x 50 x 30 = 1,200.

A further 2 in every 1,500 cameras amounts to 100 cameras.

These are checked at a cost of 10, total cost of checking = 10 x 100 = 1,000As the original sale was refunded, the relevant loss on re-sale is the discount of 100. The total cost of discounts= 100 x 100 = 10,000.

The cost of advertising to replace dissatisfied customers = 60,000

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Therefore the total costs which can be calculated are:

External failure cost of repairs, replacements, checks and discounts, all relating to cameras which were sold to customers:

1,200 + 1,000 + 10,000 = 12,200.

Internal failure cost of advertising, which is really due to the poor design of the product = 60,000.

Total calculated cost of quality = 72,200.

Further explicit costs of quality (which cannot be calculated on the information given) are the internal failure costs of reviewing

the design of the camera to eliminate the specific fault and improve performance. There are also external failure costs ofrunning a customer services department to deal with returns and complaints.

An example of an implicit cost of quality in this case is the loss of Pix Ltds potential sales growth in this market, due toacquiring a poor reputation for these products.

5.6 (a) There are numerous possible answers to this question, depending on whether you are an expert photographer orsomeone who just wants instant holiday snaps. You may have mentioned reliability, ease of use, good results, valuefor money, a high quality lens, a famous brand name, light weight, etc.

(b) A camera manufacturer carrying out value analysis may ask:

are all the functions on the cameras essential? can components be standardised across a range of cameras?

do all the features of the cameras add value?

can the cameras be made lighter or smaller?

can production costs be reduced (by saving time, for example) without reducing value to the customer?

5.7 (a) It is important to plan long-term cost reduction policies in order to achieve long-term improvements in productivity andefficiency and hence in profits. Permanent, planned changes in working methods are more cost-effective than suddenalterations to cut costs.

Cutting costs as part of a crash programme may damage the organisation in the long-term, as costs such as training,research and development are likely to be cut. This may improve short-term profits, but spending in these areas is

essential for the future.(b) Work study may help to reduce costs by:

Identifying the most efficient methods of working

Improving the lay-out of the factory to save time

Identifying ways to reduce the waste of resources.

(c) Costs which may be reduced, other than production costs, include:

Finance costs: the interest payable on loans and overdrafts, foreign exchange, the cost of capital tied up instock and the timing of capital expenditure may offer scope for cost reduction

Energy costs: savings may be made by energy conservation

Staffing: numbers of staff needed and the skill levels required should be considered

Consumables: the control of purchases and of stocks of items such as stationery may need to be tightened

to make savings Authorisation of expenditure: all expenditure should be subject to proper authorisation at a sufficiently high

level of management.

(d) The implications of value engineering in the design of a new product include:

Building in quality and value, while keeping costs down

Ensuring that every part or feature is necessary and contributes value i.e. designing the product to satisfyusers requirements

Considering whether components can be standardised across a range of products

Designing the product so that it can be manufactured using efficient methods

When the product is put into production, there should be more efficient use of resources and hence higherprofits

There should be improved performance and reliability and more customer satisfaction with the product.(e) Variety reduction as a way of reducing costs and enhancing value means that:

The variety of products being manufactured may be reduced, although care must be taken to maintain a rangeof products which will satisfy customers requirements. This may speed up production of the remainingproducts.

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The variety of components being used may be reduced by standardising parts across a range of products. Thismay allow for greater use of automation, bulk purchasing, more efficient manufacture and easier repairs whenrequired.

5.8 (a) Explicit costs of quality are those costs of quality that can be recorded by the organisations informationsystem and can be put into money terms. They may be costs of prevention and appraisal or of failures (bothinternal and external).

(b) The explicit costs of quality incurred by Gill Ltd for the year ended 31 December 2004 are (in 000s):

G3 inspection costs 22

Costs relating to purchases returns 12

Costs of reworking 30

Customer services relating to G3 faults 43

Total 107

Total explicit costs of quality = 107,000.

(c) Implicit costs of quality are those cannot be recorded or given in money terms. This may be because they cannot beseparated out from other costs or because they represent the loss of future benefits that are not known with certainty.

Examples for Gill Ltd include (one required) costs resulting from the disruption of production processes and the lossof future sales due to the loss of customer goodwill.

(d) The fault-free supplies of G3 would save Gill Ltd the whole of the explicit cost of quality of 107,000. The additionalcost of G3 would be, assuming the same level of production, 340,000 x 15% = 51,000. Therefore, at this level ofproduction, the net operating profit would increase by 56,000. Financially, the fault-free supplies would be worthwhileand the company would also benefit from improvements in staff morale and in its reputation.

5.9 (a) (i) Expected total sales revenue from XL = 375 x 18,000 = 6,750,000

(ii) Target operating profit required = 6,750,000 x 20% = 1,350,000

(iii) Total target cost = 6,750,000 1,350,000 = 5,400,000

(iv) Target cost per unit of XL = 5,400,000/18,000 = 300

(b) Value engineering means that the value of every aspect of the product is analysed at the design stage. Lodden plc

may use the techniques of value engineering in order to ensure that the target level of cost is achieved. If the costsare too high, the design will have to be re-analysed. Features of the design may be altered to reduce the cost withoutaffecting the value of the product. If the product cannot be designed in such a way that the expected cost per unit is300 or less, then it is not worthwhile to launch it at this selling price (assuming that the market research gives arealistic forecast of demand).

5.10 (a) (i) Total life cycle sales revenue:

Case 1: 5,000 x 400 = 2,000,000

Case 2: 4,500 x 480 = 2,160,000

(ii) Total life cycle costs

Case 1 Case 2

000s 000s

Research, development and design 60 60Production costs 610 585

Selling and distribution 440 420

Customer support 435 435

Total life cycle costs 1,545 1,500

(iii) Total life cycle profit from the processor:

Case 1: 2,000,000 1,545,000 = 455,000

Case 2: 2,160,000 1,500,000 = 660,000

(b) The percentage profit on sales in case 1 is (455/2,000) x 100% = 22.75%

The percentage profit on sales in case 2 is (660/2,160) x 100% = 30.56%

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Therefore case 1 does not reach Nett plcs target level of profit percentage, but case 2 gives a percentage profit just abovethe target level. Provided that the forecasts for the life cycle costs and revenues are reliable, it would be worthwhile to developthe processor and sell it at the higher price of 480 per unit. It should be noted that a relatively small increase in costs wouldreduce the profit to below 30% in case 2 and cost control is essential. It would be worthwhile to look for cost reductions, butcare must be taken because reducing some costs may cause others to increase. (For example, reducing design or productioncosts may affect the performance of the processor and result in higher costs for customer support.)

CHAPTER 6: MEASURING PERFORMANCE

6.1 (a) A performance indicator may be used for:

identifying problems

controlling costs

measuring the utilisation of resources

measuring an individuals performance

planning.

(b) Comparisons are more useful than individual figures, because it is often difficult to draw any conclusion from anindividual figure, without an indication of the level at which the particular figure should be. Data from previous periods,from standards or from other organisations can give an indication of what is expected and therefore comparison with

these is more useful. Comparisons may show where there are problems. These can be seen in changes over periodsof time, or differences from standards or targets. Trends may be identified if data can be compared over a number oftime periods.

(c) The three kinds of comparison which are useful are:

comparing with standards, budgets or targets

comparing with other periods of time

comparing with other similar organisations.

6.2 M. Lomas

Workings are shown at the end of the comments.

30 June 2004 30 June 2003Gross Profit % of Sales (W1) 30.8% 34.8%

Net Profit % of Sales (W2) 17.9% 23.7%

Administration expense as % of Sales (W3) 7.7% 6.7%

Selling expense as % of Sales (W4) 5.1% 4.4%

Comments: From the original figures, it can be seen that Sales Revenue, Purchases and Expenses have all increased inthe second year. Administration, which would probably be expected to be a fixed cost, has increased significantly. Stocklevels have decreased in both years. The Gross Profit has increased very slightly and the Net Profit has decreased.

The ratios show that the Gross Profit margin has decreased, which could be due to increased purchase costs or having to

reduce selling prices, or both. A reduction in Net Profit percentage has resulted from the decreased Gross Profit margin andthe increased expenses. Both Administration and Selling expenses have increased at a greater rate than sales. This can beseen by the increased expense percentages.

M. Lomas should consider the reasons for the decrease in Gross Profit margin. The increase in expenses should beinvestigated, particularly the administration expenses. Stock levels could also be reviewed, to make sure that there is no riskof running out of stock.

Workings:

30 June 2004 30 June 2003

W1: (240 780) x 100% = 30.8% (235 675) x 100% = 34.8%

W2: (140 780) x 100% = 17.9% (160 675) x 100% = 23.7%

W3: (60 780) x 100% = 7.7% (45 675) x 100% = 6.7%

W4: (40 780) x 100% = 5.1% (30 675) x 100% = 4.4%

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6.3 Robins Ltd:

(a) Formulae:

ROCE = Operating Profit x 100%

Fixed assets + net current assets

Asset turnover = Turnover times

Fixed assets + net current assets

Operating profit margin = Operating profit x 100%

Turnover

Therefore:

Return on Capital Employed: (267 890) x 100% = 30.00%

and (240 860) x 100% = 27.91%

Asset turnover: (2,000 890) x 100% = 2.25 times

and (1,920 860) x 100% = 2.23 times

Operating profit margin: (267 2,000) x 100% = 13.35%

and (240 1,920) x 100% = 12.50%

Summary: Year ended 30 September: 2004 2003

Return on Capital Employed 30.00% 27.91%

Asset Turnover (number of times) 2.25 2.23

Operating Profit Margin 13.35% 12.50%

(b) The relationship between the three ratios in (a) is:

ROCE = Operating Profit Margin x Asset Turnover

(This is shown below for Robins Ltd, subject to rounding differences).

(c) Referring to the relationship between the ratios, for Robins Ltd, the reason for the increase in the ROCE from the firstto second year can be seen to be due to the increase in Operating Profit Margin,because the Asset turnover hasremained almost unchanged.

We have (with small rounding differences)

27.91 = 12.50 x 2.23 for the first year

30.00 = 13.35 x 2.25 for the second year.

6.4 (a) The most significant changes in the given data are (two required):

sales revenue has increased (by 2.6%)

stock levels are considerably lower than at the start of 2003

gross profit has decreased although sales have increased

operating profit has decreased although sales have increased

there are additions to the fixed assets (30,000)

the cash at bank has decreased by 14,000, taking it into an overdraft situation

The last three points above are the most significant changes to be seen in the given data.

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(b) Using the usual formulas:

2004 2003

(i) gross profit margin on sales 29.9% 32.0%

(ii) operating profit margin on sales 11.6% 15.3%

(iii) return on capital employed 23.1% 30.1%

(iv) asset turnover 1.99 times 1.96 times

(v) average age of debtors in days 44 days 36 days(vi) average age of stock in days 15 days 24 days

(vii) average creditors payment period in days 32 days 34 days

(viii) current ratio 2.3:1 2.4:1

(ix) quick (acid test) ratio 1.8:1 2.0:1

Note that average stock is used in (vi), for example in 2004 the average stock is (14 + 20)/2 = 17.

Therefore the average age of stock is calculated as (17/422) x 365 days.

(c) The most significant changes in the ratios are (two required):

the operating profit margin has decreased from 15.3% to 11.6%

the return on capital employed has decreased from 30.1% to 23.1%

the average age of debtors has increased from 36 to 44 days

the average age of stock has decreased from 24 to 15 days

The possible reasons for these changes include the following (comments required for the two ratios identified).

The decrease in operating profit margin is partly due to a decrease in the gross profit margin and partly due to anincrease in selling and distribution costs, which have gone up faster than sales.

The decrease in the return on capital employed is due entirely to the decrease in operating profit margin, because theasset turnover is almost the same.

The increase in debtors payment period may be due to allowing more credit in order to get new customers and

increase sales. The balance sheet may not, however, show a typical figure.

The decrease in the average age of stock (using average stocks) may be the result of a policy decision to keep lowerstocks. No firm conclusion is possible, because the balance sheet may change with a single transaction the next day.If purchases are on order, the ratio may look quite different when the order arrives.

6.5 Laito Dairies Ltd: Newtown Dairy (workings for ratios in 000s)

(a) Gross Profit margin = (762 1,300) x 100% = 58.6%

Operating profit margin = (152 1,300) x 100% = 11.7%

Return on Capital Employed = (152 1,667) x 100% = 9.1%

Asset turnover = 1,300 1,667 = 0.8 times

The average age of debtors = (45 1,300) x 365 = 12.6 days

(We have no information about whether any sales are cash, not credit).

Average finished goods stock = 0.5 x (2 + 4) = 3

The average age of finished goods stock (using average stock) = (3 538) x 365 = 2.0 days.

(b) The current ratio = Current assets current liabilities = 77 110 = 0.7, i.e. 0.7 : 1

The quick ratio = (Current assets stock) current liabilities = (77 7) 110 = 0.6, i.e. 0.6 : 1.

The main factor which affects the current ratio is the low stock value due to the perishable nature of the goods. The

quick ratio is affected by the low debtors figure, possibly because there are cash sales, although no information wasgiven about the split of turnover. The two liquidity measures would be relatively low in this type of business, as a resultof these two factors, either of which would be a suitable answer.

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(c) (i) If Newtown Dairy had achieved the target ROCE of 15%, its Operating Profit would have been15% x 1,667,000 = 250,050.

(ii) If Newtown Dairy had achieved the target Asset Turnover of 1.2 times, its Turnover would have been1.2 x 1,667,000 = 2,000,400.

6.6 (a) Using the formula:

Debtors x 12 = Average age of debtors in months

Credit sales

Debtors x 12 = 1.2

283,800

Therefore closing debtors = 283,800 x 1.2/12 = 28,380

(b) Using the formula:

Closing stock x 12 = Average age of closing stock in months

Cost of sales

Closing stock x 12 = 2

198,660

Therefore closing stock = 198,660 x 2/12 = 33,110

(c) Using the formula:

Creditors x 12 = Average age of creditors in months

Credit purchases

Creditors x 12 = 1.5

201,760

Therefore creditors = 201,760 x 1.5/12 = 25,220

6.7 Walkers Ltd Redridge Branch

(a) Return on Capital Employed = (56.7 173.2) x 100% = 32.7%

Gross profit margin = (259.2 540.0) x 100% =

unit 33 activities

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