Orchid Ltd. is a small furniture manufacturer. It was established as a family-ow
ID: 2419017 • Letter: O
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: £ 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 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: £ Sales revenue 753,300 Less Direct materials (192,500) (7,000m) Direct labour (221,000) (8500 hours) Fixed overheads (130,000) Operating profit 209,800 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, and within the Business Report as required for part 3. 1. Calculate the flexed and actual budget. 2. Calculate the following variances: - Sales variances; volume and price - Direct material variances; usage and price - Direct labour variances; efficiency and rate - overhead variance; spending 3. 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 Comment
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 vol-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 Management Report for improvement in cost conrol 1. Sale variance: Though the volume variance for sale is favorable, the price variance is unfavorable. The cause may be higher discount on sales or any other sales incentive to achieve volume. Management needs to pay attention to discourage additional discounts or rebates that may reduce the profitability. 2. Material Variance: Though the price variance is favorable, the usgae variance is unfavorable. Usage may be higher due to bad quality material purchased or inefficicnecy of direct labor. Both the factors need to be taken care of to avoid additional usage of direct material. 3. Direct Labor: Both usage and price variance are unfavorable. The shortage of skilled craftsman after the retirement of experienced craftsmen is causing the labor rate and usage beyond control. Immediate attention of management is required to recruit , train and retain good craftsmen to reduce the labor usage variance and have quality work. 4. Fixed overhead variance : Though unfavorable , the variance is small and considering the higher volume generated , is acceptable.
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