1 Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple process,
removes the outer husk of the rice to produce the brown rice. This means that there is substantial loss of weight in
the process. The market for the purchase of seeds and the sales of brown rice has been, and is expected to be, stable.
Chaff Co uses a variance analysis system to monitor its performance.
There has been some concern about the interpretation of the variances that have been calculated in month 1.
1. The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely
and saved the company thousands of dollars in purchase costs by buying the required quantity of cheaper seeds
from a new supplier.
2. The production director is upset at being criticised for increasing the wage rates for month 1; he feels the decision
was the right one, considering all the implications of the increase. Morale was poor and he felt he had to do
something about it.
3. The maintenance manager feels that saving $8,000 on fixed overhead has helped the profitability of the
business. He argues that the machines’ annual maintenance can wait for another month without a problem as
the machines have been running well.
The variances for month 1 are as follows:
$
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Variable overhead expenditure 18,000 (Adv)
Variable overhead efficiency 30,000 (Fav)
Fixed overhead expenditure 8,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)
Fav = Favourable, Adv = Adverse
Chaff Co uses labour hours to absorb the variable overhead.
Required:
(a) Comment on the performance of the purchasing manager, the production director and the maintenance
manager using the variances and other information above and reach a conclusion as to whether or not they
have each performed well. (9 marks)
In month 2 the following data applies:
Standard costs for 1 tonne of brown rice
– 1·4 tonnes of rice seeds are needed at a cost of $60 per tonne
– It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is normally paid $18 per hour. Idle
time is expected to be 10% of hours paid; this is not reflected in the rate of $18 above.
– 2 hours of variable overhead at a cost of $30 per hour
– The standard selling price is $240 per tonne
– The standard contribution per tonne is $56 per tonne
Budget information for month 2 is
– Fixed costs were budgeted at $210,000 for the month
– Budgeted production and sales were 8,400 tonnes
The actual results for month 2 were as follows:
Actual production and sales were 8,000 tonnes
– 12,000 tonnes of rice seeds were bought and used, costing $660,000
– 15,800 labour hours were paid for, costing $303,360
– 15,000 labour hours were worked
– Variable production overhead cost $480,000
– Fixed costs were $200,000
– Sales revenue achieved was $1,800,000
Required:
(b) Calculate the variances for month 2 in as much detail as the information allows and reconcile the budget
profit to the actual profit using marginal costing principles. You are not required to comment on the
performance of the business or its managers for their performance in month 2. (16 marks)
(25 marks) 1 Chaff Co
(a) When assessing variances it is important to consider the whole picture and the interrelationships that exist. In Chaff there
appears to be doubt about the wisdom of some of the decisions that have been made. Favourable variances have been
applauded and adverse variances criticised and the managers in charge dispute the challenge to their actions.
Purchasing manager. The purchasing manager has clearly bought a cheaper product, saving $48,000. The cause of this is
not specified and it could be due to good buying or negotiation, reductions in quality or changes in overall market conditions.
We are told the market for buying seeds is stable, so there is more likely to be an internal reason for the problem. The material
usage variance is significantly adverse, indicating much more waste than is normal has occurred in month 1. This suggests
that the quality of the seed bought was poor and as a result a $52,000 excess loss has occurred. It is possible that the waste
was caused by the labour force working poorly or too quickly and this has to be considered.
The sales price achieved is also well down on standard with the sales price variance showing an $85,000 loss of revenue
and (therefore) profit. We are told that the market for sales of brown rice is stable and so it is reasonable to presume that the
fall in sales price achieved is as a result of internal quality issues rather than general price falls. The purchasing manager of
the only ingredient may well be responsible for this fall in quality. This may have also led to a fall in the volume of sales,
another $21,000 of adverse variance.
In conclusion the purchasing manager appears mainly responsible for a loss of $110,000* taking the four variances above
together.
* ($85,000 + $52,000 + $21,000 – $48,000)
Production director. The production director has increased wage rates and this has cost an extra $15,000 in month 1.
However one could argue that this wage increase has had a motivational effect on the labour force. The labour efficiency
variance is $18,000 favourable; and so it is possible that a wage rise has encouraged the labour force to work harder.
Academic evidence suggests that this effect might only be temporary as workers get used to the new level of wages.
Equally the amount of idle time has reduced considerably, with a favourable variance of $12,000 resulting. Again it is possible
that the better motivated labour force has been more willing to work than before. Idle time can have many causes, including,
material shortages or machine breakdowns. However, we are told the machines are running well and the buyer has bought
enough rice seeds.
In conclusion the increase in the wage rate did cost more money but it may have improved morale and enhanced productivity.
The total of the three variances above is $15,000* Fav. *($18,000 + $12,000 – $15,000)
Maintenance manager. The maintenance manager has decided to delay the annual maintenance of the machines and this
has saved $8,000. This will increase profits in the short term but could have disastrous consequences later. In this case only
time will tell. If the machines breakdown before the next maintenance then lost production and sales could result.
The maintenance manager has only delayed the spend and not prevented it altogether. A saving of $8,000 as suggested by
the variance has not been made. It is also possible that the adverse variable overhead expenditure variance has been at least
partly caused by poor machine maintenance.
The variance calculated is not the saving made as it represents a timing difference only. The calculation also ignores the risks
involved.
(b) The standard contribution is given, but could be calculated as follows (not required by the question but shown as a proof):
$ $
Sales price 240
Less:
Rice seed (1·4 Tonnes x $60/tonne) 84
Labour (2 hours x $20/hr) 40
Variable overhead (2 hours x $30/hr) 60
––––
Marginal costs of production 184
––––
Standard contribution 56
––––
The standard labour charge needs to be adjusted to reflect the cost to the business of the idle time. It is possible to adjust
the time spent per unit or the rate per hour. In both cases the adjustment would be to multiply by 10/9 – a 10% adjustment.
In the case above the rate per hour has been adjusted to $18 x 10/9 = $20/hr. (Both approaches would gain full marks.)
In order to reconcile the budget profit to the actual profit, both these profits need to be calculated and an operating statement
prepared.
13
Budget profit statement for month 2
$ $
Sales (8400u x $240/u) 2,016,000
Less:
Rice seed (1·4 tonnes x $60/tonne x 8,400 tonnes) 705,600
Labour (2 hours x $20/hr x 8,400 tonnes) 336,000
Variable overhead (2 hours x $30/hr x 8,400 tonnes) 504,000
––––––––
Marginal costs of production 1,545,600
––––––––––
Contribution 470,400
Less Fixed costs 210,000
––––––––––
Budget profit 260,400
––––––––––
Actual profit for month 2.
$ $
Sales 1,800,000
Less:
Rice seed 660,000
Labour 303,360
Variable overhead 480,000
––––––––
Marginal costs of production 1,443,360
––––––––––
Contribution 356,640
Less Fixed costs 200,000
––––––––––
Actual profit 156,640
––––––––––
Operating statement for month 2
$ $ $
Budget contribution 470,400
Variances: Adverse Favourable
Sales price 120,000
Sales volume 22,400
––––––––
142,400
––––––––
328,000
Material price 60,000
Material usage 48,000
Labour rate 18,960
Labour efficiency 20,000
Idle time 15,600
Variable overhead efficiency 30,000
Variable overhead expenditure 30,000
–––––––– ––––––––
96,960 125,600 28,640
––––––––
Actual contribution 356,640
Budget fixed cost 210,000
Less: Fixed cost expenditure variance 10,000
––––––––
Actual fixed cost 200,000
––––––––
Actual profit 156,640
––––––––
Workings for the variances in month 2
1. Sales price: (225 – 240)8,000 = 120,000 Adv
2. Sales volume: (8,000 – 8,400)56 = 22,400 Adv
3. Material price:
4. Material usage: (12,000 – 11,200*)60 = 48,000 Adv
*(8,000 x 1·4 = 11,200)
5. Labour rate: (19·20 – 18)15,800 = 18,960 Adv
6. Labour efficiency: (15,000 – 16,000)20 = 20,000 Fav
7. Idle time: (800 – 1,580*)20 = 15,600 Fav
*10% of 15,800
14
660 000
12 000
60 12 , 000 60 000
,
– , ,
⎛
⎝ ⎜
⎞
⎠ ⎟
= Fav
8. Variable overhead expenditure:
9. Variable overhead efficiency variance: (15,000 – 16,000)30 = 30,000 Fav
Alternative calculations if standard hours adjusted for expected idle time and not the rate.
Standard cost (2 hours x 10/9) x $18 = $40 per tonne
Or 2·222 hours x $18 = $40 per tonne
Rate variance as above = 18,960 Adv
Idle time: (800 – 1,580)18 = 14,040 Fav
Efficiency variance: (15,000 – 16,197·77777*)18 = 21,560 Fav
* (standard time allowed less standard idle time)
Standard time is 8,000 tonnes x 2·222 hours = 17,777·777 hours
Standard idle time is 10% of 15,800 = 1,580 hours
Therefore expected working hours is 17,777·777 – 1,580 = 16,197·777 hours
(Note – there are many alternative methods of dealing with this issue, any reasonable attempt was accepted.) |
发表于 2008-10-11 13:35
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