Question 5 Charles Cameron, Managing Director of the Ultra Mix Company isconcern

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Question 5 Charles Cameron, Managing Director of the Ultra Mix Company isconcerned about the company’s pricing policy, labour costs and material usage. He has askedyou to look at one of the company’s products, the Colate, to see if there is a need for aninvestigation over any or all of his concerns. The company uses a standard marginal costing system. The standard cost card for the Colate is as follows: Item £ Direct material A 10kg @ £5/kg 50 Direct material B 30kg @ £4/kg 120 Direct labour 12hours @ £8/hour 96 Variable cost per unit 266 Budgeted selling price 350 Contribution 84 The budgeted fixed cost is £19,200 and the budgetedvolume is 800 units of Colate. The actual results for last year were: Sales revenue 830 units of Colate sold for£288,840 Direct material A 7,470kg used at a cost of£36,603 Direct material B 26,560kg used at a cost of£103,584 Direct labour 10,790 hours used at a cost of£87,399 Fixed overhead £19,400 Required a) Produce a flexible budget statement and include the salesvolume contribution variance in a footnote to your flexed budget statement.
b) Calculate price and quantity variances for both materialsand labour.
c) Comment on the concerns of the managing director in thelight of your analysis.
Lifesaver points to be given, please! Question 5 Charles Cameron, Managing Director of the Ultra Mix Company isconcerned about the company’s pricing policy, labour costs and material usage. He has askedyou to look at one of the company’s products, the Colate, to see if there is a need for aninvestigation over any or all of his concerns. The company uses a standard marginal costing system. The standard cost card for the Colate is as follows: Item £ Direct material A 10kg @ £5/kg 50 Direct material B 30kg @ £4/kg 120 Direct labour 12hours @ £8/hour 96 Variable cost per unit 266 Budgeted selling price 350 Contribution 84 The budgeted fixed cost is £19,200 and the budgetedvolume is 800 units of Colate. The actual results for last year were: Sales revenue 830 units of Colate sold for£288,840 Direct material A 7,470kg used at a cost of£36,603 Direct material B 26,560kg used at a cost of£103,584 Direct labour 10,790 hours used at a cost of£87,399 Fixed overhead £19,400 Required a) Produce a flexible budget statement and include the salesvolume contribution variance in a footnote to your flexed budget statement.
b) Calculate price and quantity variances for both materialsand labour.
c) Comment on the concerns of the managing director in thelight of your analysis.
Lifesaver points to be given, please!

Explanation / Answer

PriceVariance ActualSales 830 BudgetedSales 800 Difference 30 Sales Price 350 PriceVariance 10,500 Materials A QuantityVariance ActualQuantities 7,470 BudgetedQuantities 8,000 Difference -530 Cost perunit 5 Materials QuantityVariance -2,650 Materials B QuantityVariance ActualQuantities 26,560 BudgetedQuantities 24,000 Difference 2,560 Cost perunit 4 Materials QuantityVariance 10,240 Labors QuantityVariance ActualQuantities 10,790 BudgetedQuantities 9,600 Difference 1,190 Cost perunit 8 Labors QuantityVariance 9,520 For the flexible budgets variance, positive meansgood news, while negative means bad news. From the statement, firmmake less sales and profit than budgeted. Most probably is cause bythe high variable cost than budgeted price. From direct materials bquantity variance, the firm over cost 10,240. Similar situation inlabors, the cost of direct labor is over. The management of firm should focus on 2 ways. First, is try toselling in higher price. Next, try to reduce the variablecost.

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