Question

Section 83(3) of the Public Financial Management Act, 2016, Act 921 states that the Internal Auditor of a covered entity shall provide assurance on the efficiency, effectiveness and economy in the administration of the programmes and operations of the covered entity.

The following information was extracted from a covered entity for the month of December, 2017:

a) Machine Capacity – Monthly Output of    10,000 units

b) Maximum Market Demand for the month               6,000 units

c) Actual Production for the month      8,000 units

d) 1 (one) unit of output requires:              2 units of input

e) Standard cost of 1 unit of input    GH¢ 3

f) Actual material input for the month was 15,000 units    GH¢ 42,000

The covered entity uses Just in Time stock inventory management

Required
a.) Prepare an appraisal and report on value for money on public expenditure of the covered entity for the month of January, 2017

Answer 1

Appraisal Report:

Market demand for the month was 6,000 units.

The company follows Just in Time stock inventory . It should also strive to keep zero inventory of finished goods by producing as per marke demand. The production fot the month should have been 6,000 units.

Standard cost of inputs for actual production=(8000*2*3)=48000

Actual input for production of 8000 units=42,000

There is a favourable variance of (48000-42000)=6000

Total Input Variance=6000(favourable)

Input Quantity Variance=Standard price*(Standard quantity-Actual quantity)=3*((8000*2)-15000)=3000(Favourable)

Input Price variance=Actual Quantity*(Standard Price-Actual Price)=15000*(3-(42000/15000))=3000(Favourable0

The management of input material inventory, utilization and purchase price is satisfactory.

However, the quantity produced should be as per sales , to minimize finished goods inventory.

There should be greater efforts in marketing to increase sells to increase utilization of machine capacity.