Question

I need the answer for PART B and PART C of this question:

You have recently been appointed management accountant for Rugby Coffee Mugs Pty Ltd. The company commenced its operations on 1 July 2019 manufacturing one size coffee mugs with individual club names and club logos of rugby union clubs playing in the New South Wales, Queensland, Victoria and Western Australia local rugby union competition. The company currently does not have any management accounting controls and part of your appointment involves improving the company’s manufacturing internal control systems to facilitate the projection, monitoring and if need be the taking immediate action to ensure that the company’s internal manufacturing performance is efficient thereby ensuring that the company’s profitability is maximised. Given the urgency of the situation, you have decided to propose to the company’s chief financial officer that you establish a budget and standard costing system against which actual performance will be measured in quantitative and qualitative terms. Additionally, you will prepare a static budget for the month of March 2020, subsequent to which you will prepare a flexible budget for the month of March 2020 against which the actual performance in March 2020 will be measured, and an explanation of specific variations in performance against the static and flexible budget. A report to the chief financial officer will include the following:

1. Initial memorandum explaining the key issues relating to the establishment of budgets and a standard costing system.

2. A static budget for the month of March 2020.

3. Flexible budget responding to the actual performance in the month of March 2020.

4. A table showing the variance between the actual performance and the static and flexible budgets for the month of March 2020.

5. An explanation of specific variations in actual performance against the static and flexible budgets.

PART B You have developed the following standard costs and budget for the month of March 2020:

- Average selling price per coffee mug $8.20 Direct materials

- Direct materials cost per gram $0.036

- Number of grams per coffee mug 100 Direct manufacturing labour

- Direct manufacturing labour cost per hour $15.00

- Average labour productivity rate (coffee mugs per hour) 100

Sales commission cost per coffee mug $0.72

Fixed overhead $990,000

Budgeted sales for March in units 700,000

Budgeted hours - 700,000 units / 100 units per hour: 7,000

The following are the actual results for March 2020:

▪ Unit sales and production were 90% of budget.

▪ Actual average selling price per coffee mug was $8.30.

▪ Actual direct materials cost per gram was $0.039.

▪ Direct materials used amounted to 100 grams per coffee mug.

▪ Actual direct manufacturing labour cost was $15.20 per hour.

▪ Productivity dropped to 90 coffee mugs per hour.

▪ Actual sales commissions were $0.70 per coffee mug.

▪ Fixed overhead costs were $20 000 above budget.

Required Prepare a report to the company’s chief executive officer showing the following for March 2020:

1. Static-budget and actual operating profit.

2. Static-budget variance for operating profit. (1 mark)

3. Detailed flexible-budget operating profit and variance with actual results.

4. Net total flexible-budget variance for operating profit.

5. Net total sales-volume variance for operating profit.

6. Price and efficiency variances for direct materials.

7. Price and efficiency variances for direct manufacturing labour.

8. Net flexible-budget variance for direct manufacturing labour. (1 mark)

PART C

Required: Prepare a report to the company’s chief financial officer addressing the following:

1. Identification of three possible causes of the total direct materials variance.

2. Explanation of three possible reasons for the total direct labour variance.

3. Explanation of how your variance analysis will help in continuous improvement.

4. Explanation of why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?

5. Commentary on the following statement made by a plant manager: ‘Meetings with my management accountant are frustrating. All he wants to do is pin the blame on someone for the various variances he reports.’

6. Explanation of why is it important that the managers do not evaluate variances in isolation? (3marks)

Answer 1

Solution: