Question

Standard Costing

Answer Approach Required (steps)

Mayfield Ltd manufactures a small part used in the automotive industry. You are the Management Accountant of the company and have been presented with the following information to allow you to prepare a performance report for the year ended 31st March 2020.

The budgeted level of production and sales for the year was 265,000 units and the standard manufacturing cost per unit was as follows;

                                                                                                €         

Direct materials 2.2 kg @ €11.50 each                                   25.30

Direct labour 2 hours @ €11 per hour                                   22

Variable manufacturing overhead 2hrs @ €13                        26                               

Fixed manufacturing overhead 2 hrs @ €14.50                       29                 

Standard manufacturing cost                                                  102.30

During the year, demand for the company’s product exceeded expectations. 280,000 units were manufactured and sold, generating sales revenue of €38,920,000. Shortly after establishing the standard costs for the year Kenny Ltd was forced to find a new supplier to meet its direct material requirements. Throughout the period the new supplier charged a price which was 10% in excess of the standard price. In total 600,000 kg was purchased and used. The company uses a Just-in-Time system so there were no closing stocks.

With regard to direct labour cost, while the actual rate paid to direct manufacturing employees was €0.20 per hour below standard rates, there were some labour efficiency problems encountered during the year. The employees reported difficulties handling the materials resulting in each unit taking 10% longer than the standard time.

Direct labour hours is the basis used by Kenny for allocating both variable and fixed manufacturing overheads to units of production. In the year ended 31st March 2020 the actual variable manufacturing overhead cost amounted to €8,069,000 and the fixed manufacturing overhead amounted to €9,240,000.

Requirements

1. Prepare the cost variances for Kenny Ltd for the year to 31st March 2020 in as much detail as the information given above permits.

After presenting the variances that you have calculated in part (a) above at a management meeting one of the management team expresses the view that while he ‘understands the reasons for the material and labour variances he is confused about the fixed and variable overhead variances’

2. Briefly interpret and explain the reasons for the variable and fixed overhead variances that you have calculated for the benefit of the management team.   
3. Calculate the actual gross profit earned by Kenny Ltd. for the year ended 31st March 2020.   
4. Write a short CEO brief discussing succinctly the benefits and problems with standard costing. Address the relevance of standard costing to the modern business environment.

Answer 1