Orchid Ltd. is a small furniture manufacturer. It was established as a family-ow
ID: 2763649 • 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:
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:
Sales variances; volume and price
Direct material variances; usage and price
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.
This assignment should be around 1,000 words for the main body of your Business Report
£ 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 300.00Explanation / Answer
Orchid Ltd. the flexed and actual budget.
3)Variable costs: (£)
Direct Material Cost
Direct Labour Cost
Total Variable Cost
194,400
202,500
396,900
192,500
221,000
413,500
Sales Variance:
Volume Variance : = (Budgeted contribution margin per unit) x (Actual units sold - Static budget units sold)
= (£ 950 - £ 490) x ( 810 units - 800 units)
= £ 4,600 F
Selling-price variance = ( Actual Selling price - Budgeted selling price ) Actual units sold
= ( £ 753,300/ 810 units - £ 950 ) x 810 units
= (£930 -£ 950 ) x 810 units
= £ 16,200 U
Direct Material Variances:
Price Variance = ( Actual price of input - Budgeted price of input ) x Actual quantity of input
= ( *£ 27.5 - £ 30 ) x 7,000 m = £ 17,500 F
* £192,500 / 7,000m =£ 27.5
Usage Variance = ( Actual quantity of input used - Budgeted quantity of input allowed for actual output) x Budegted price of input
= ( 7,000 - 8m x 810units ) x £ 30
= £ 15,600 U
Direct Labour Variance:
Rate Variance : ( Actual rate per input - Budgeted rate of input) x Actual hour (quantity)
: (*£ 26 - £ 25 ) x 8,500 hours
* 221,000/8,500 hours
: £ 8,500 U
Effeciency Variance : ( Actual quantity of input used - Budgeted quantity of input allowed for actual output) x Budegted price of input .
: ( 8,500 hours - 10 hours x 810 units) x £ 25
: £ 10,000 U
Fixed Overhead Spending Variance : Actual Fixed Overhead cost - Budgeted Fixed Overaheads
: £ 130,000 - ( 800 units x £ 160)
: £ 2,000 U
Variance Report and Analaysis:
the above report show clearly that due to labour inefficiency adverse causes occured like, Material Usage variance Labour efficiency variances &Fixed overhead budget variance. The managament has to concentrate to recruit highly skilled workforce who has experience and effeciency.
Flexible Budget Actual Result 1) Units Sold 810 810 2) Revenue (£) 769,500 753,3003)Variable costs: (£)
Direct Material Cost
Direct Labour Cost
Total Variable Cost
194,400
202,500
396,900
192,500
221,000
413,500
3) Contribution Margin (1-2) £ 372,600 339,800 4) Fixed Overheads £ 128,000 130,000 5) Operating profit £ 244,600 209,800Related Questions
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