Question

A joint venture has been set up between Golden Coast Poultry Ltd and J Handie Building Supplies Ltd to establish a new company, Lightweight Ltd, to manufacture and sell ceiling tiles made from this material. A joint working group from the two companies developed an initial plan for Lightweight’s first year of operation. This showed that it would produce and sell 10,000 tiles. The manufacturing specifications stated that each tile would use 3 kgs of raw materials costing $10 per kg and require 5 hours of direct labour paid at $8 per hour. Variable production overheads of $200,000 are allocated to finished goods on the basis of direct labour hours. The budgeted selling price and costs for the first year of operation, ending 30 June 2012, were as follows: BUDGET FOR 10,000 UNITS per tile Planned Sales $2,500,000 250.00 Direct materials $ 300,000 30.00 Direct labour $ 400,000 40.00 Variable production overhead $ 200,000 20.00 $ 900,000 Total Contribution $1,600,000 160.00 Fixed Costs $ 70,000 Net Profit $1,530,000 Page 2 of 3 The working group then interviewed applicants for the position of General Manager of Lightweight Limited and appointed Tom Perkins. At the end of the first year Tom reported that although the company had experienced some problems with the original manufacturing specifications for the new product he believed that these had now been resolved. He also explained that demand for the tiles had been strong as a result of a deal that had resulted in a large order from Buntings Builders’ Supplies. For the year ended 30 June 2012 Lightweight Ltd. managed to make and sell 11,150 ceiling tiles using 39,025 kgs of raw materials that cost $9.80 per kg and 50,175 hours of direct labour paid at $9.00 an hour. Variable production overheads cost $190,665 and fixed costs were $69,500. The following operating statement was provided: Lightweight Ltd Operating Statement for the 12 months ended 30 June 2012 The joint venture partners are pleased with the increase above the budgeted profitability but suggest that, given the boost in sales volumes, the net result could have been better. They note that, with a budgeted unit contribution of $160 per tile, the 1,150 increase in sales volume should have generated an extra contribution of $184,000 and a net profit of $1,714,000 if the budget costs and revenues had been achieved. They have therefore asked for a more detailed analysis of Lightweight’s reported results compared to the company’s original budget.

Prepare a reconcilation of budgeted and actual overhead

Answer 1