Question

Chabwino limited is a company that operates in the carpentry and joinery industry in Lusaka.

A new Finance director has just been appointed and is currently reviewing the performance of the company. One of the board members hinted to him that the company might be operating below the expectations of the company strategy and short term objectives.

The Finance director has thus decided to conduct a variance analysis for the last period in order to respond to the concern of the board member.

He has collected the following information to help with the task at hand:

Standard cost card per unit of product:

                                                                                                K

Materials                     5kg at K20 per kg                               100

Labour                         4hours at K10 per hour                       40

Variable overheads     4hours at K5 per hour                         20

Fixed overheads          4hours at K12.50 per hour                  50       

Total cost per unit                                                                   210

Profit per unit                                                                          40

Selling price per unit                                                              250

Budgeted data:

1,400 units were to be produced and sold.

Actual data:

Production and sales                                                               1,600 units

Selling price per unit                                                              K240

Direct materials           7,300kg costing                                   K153, 000

Direct Labour              5,080hours costing                              K45, 720

Variable overheads                                                                 K25, 400

Fixed overheads                                                                      K74, 000

Required:

1. As Cost accountant of the company, you have been asked to calculate all relevant variances, in as much detail as possible, and prepare a statement that reconciles budgeted profit to actual profit for the period under review.

2. From your answers in (a), advice the Finance Director whether the concerns of the board member are justified. Give reasons for your answer.

3. Identify three areas of concern which you feel Management should look at. For each area of concern, suggest two ways in which the issue can be resolved to facilitate improvement going into the next period.

4. Describe four types of standards that can be used in formulating the standard cost card of the company. Recommend one of these standards which you think would be suitable for the management role of budgetary control.

Answer 1