Orchid Ltd. is a small furniture manufacturer. It was established as a family-ow

Question

Orchid Ltd. is a small furniture manufacturer. It was established as a family-owned business 30 years ago and prides itself on high-quality products. Most of its products are made to order as a result of direct orders from Internet-based sales. Typically the company has been profitable, operating at the top end of the market; recently, however, costs appear to have been increasing and the company has also seen a decline in its sales. The workforce is highly skilled and recently several of the experienced craftspeople who make the products have retired, and the company has had problems recruiting, training and retaining suitably skilled employees. One of its products, a table, has the following standard costs:

The table is made from solid oak and the above materials reflect the size of the table in square metres. The labour required to make the table is highly skilled.

The monthly production and sales are planned to be 800 units. The actual results for March were as follows:

There were no opening or closing stocks. The company manufactured and sold 810 tables; this is more than budgeted due to a successful marketing campaign.

Required

Parts 1 and 2 should be submitted as an operating statement, as per your Key Concept Overview, and within the Business Report as required for part 3.

Calculate the flexed and actual budget.

Calculate the following variances:
1- Sales variances; volume and price
2-Direct material variances; usage and price
3-Direct labour variances; efficiency and rate

Fixed overhead variance; spending

Present the above information as a part of a Business Report, providing possible explanations for the variances that you have calculated and suggestions as to how the company might try to improve its cost control.

£ Direct materials (8m @ £30/m) 240.00 Direct labour (10 hours @ £25/hr) 250.00 Fixed overheads 160.00 650.00 Selling price 950.00 Standard profit margin 300.00

Explanation / Answer

Orchid Ltd Std cost Data Details Per units data Budgeted Data Flexible Budget Actual Data Unit Produced & sold        1 Unit Produced & sold             800 Unit Produced & sold            810 Unit Produced & sold            810 Qty Rate   Amt Qty Rate   Amt Qty Rate   Amt Qty Rate   Amt Direct Material                   8          30 240 6,400        30     192,000      6,480         30    194,400     7,000      27.50    192,500 Direct Labor                 10          25 250 8,000        25     200,000      8,100         25    202,500     8,500      26.00    221,000 Fixed Overhead 160      160     128,000    128,000    130,000 Selling price        950      950     760,000       950    769,500 Units Sold              810 Budgeted sales              800 Actual revenue      753,300 Budgeted revenue      760,000 Sales Variance        (6,700) Actual price per unit              930 Budgeted price per unit              950 Sales Volume Variance = Budgeted Price *(Actual-Std vol)                =950*10 =           9,500 F Sales Price Variance =Actual Vol*(Actual Price -Budgeted price)      =810*20=          16,200 U Direct Material usage variance = Std Price*( Actual usage-Std usage for actual vol) =30(7000-6480) =        15,600 U Direct Material Price variance= Actual usage *(Actual price-std Price) =7000*(27.5-30)=        17,500 F Direct Labor Usage Variance = Std Labor rate *(Actual Labor Hrs-Std labor hrs) =25*(8500-8100)        10,000 U. Direct Labor Price variance = Actual Labor Hrs*(Actual Labor rate-std labor rate) =8500*(25-26) =           8,500 U Fixed overhead Variance spending= 130000-128000=           2,000 U

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