Question

You oversee the production facility of CC Compounders Ltd. CC Compounders Ltd manufactures compound which is being used in various extrusion processes. You are preparing for a management meeting. One of the points on the agenda is the explanation of the variance between actual production cost and standard production cost and to decide on action plans to address the reasons for the variance.

The following is the standard cost per 1 ton of compound:

Per Unit Price Standard Cost per ton (R)

Material:

AC1032 Powder 175kg R 3.75/kg 656.25

Labour

Mixing Department 1.5 Hours R125/hour 187.50

Overheads:

Overheads are allocated

based on actual labour hours. 175.00/hour 262.50

Total standard cost per unit 1,106.25

Budgeted fixed costs amounts to R175,000 per month.
The cost clerk provided you with the following actual information for the month.

Per Unit Price Total cost
Material: AC1032 Powder 185 R3.50/kg 809,375
Labour 2 R126.50/hour 316,250
Overheads 365,219
Fixed Costs 169,000

Production for the month was 1,250 units of compound.
Required:
1. Use standard cost variance analysis to analyse and explain the manufacturing variance.
(Show all your calculations as method marks are being awarded) (18)
2. Identify the two most important areas for management to focus on. Support your suggestion with reference to the relevant variance in point 1. (2)

Answer 1