Question

ABC Company established in the year 2017 in Punjab, India. They are specialized in production of “Hemz Rose Sharabat” of different flavors. ABC Company is operating in a very competitive market. Though there is stiff competition ABC Company is able to beat and win the market share. The current market shares of ABC Company are 35%.
To improve ABC Company financial performance the company hire Mr. John as a consultant. Mr. John provide you the following information from the book of 2019. Budgeted output 20,000 Hemz Rose Sharabat Bottle.
Standard cost for one Hemz Rose Sharabat Bottle:
• 15 minutes boiling department labor and 30 minutes packing department labor
• All labor is paid at a rate of $ 7.20 per hour
• 2.5 liters of material at $ 3.46 per liters.
Fixed overheads $ 17,000
The actual figures for the four weeks of September 2019 were:
Actual output 20,000 Hemz Rose Sharabat Bottle, produced at a rate of 5,000 Hemz Rose Sharabat Bottle per week. The boiling department labor hours were as budgeted.
Electricity is provided by Punjab state power corporation limited. the electricity service is not that reliable in Panjab. Due to problems with the electricity supply, the packing department labor required an extra 850 hours to complete the output. Halfway through the month, boiling department labor was awarded a 5% pay rise.
The last week’s production of 5,000 Hemz Rose Sharabat Bottle used material costing $ 3.56 per liter Quantity of material used was as budgeted. Fixed overheads $ 15,730
Required:

a) Calculate, for the month of September 2019, the:
i. Standard cost of one Hemz Rose Sharabat Bottle (4 Marks)
ii. Actual cost of 20,000 Hemz Rose Sharabat Bottle (10 Marks)
iii. Actual cost of one Hemz Rose Sharabat Bottle (3 Marks)

b) Calculate, for the month of September 2019 the:
iv. Labour rate variance (5 Marks)
v. Labour efficiency variance (4 Marks)
vi. Total labour variance (3 Marks)
vii. Material price variance (5 Marks)

c) Complete, ABC Company for the month of September 2019, the reconciliation statement of the total budgeted cost of output to the total actual cost of output. You must show clearly whether the variance is favorable or adverse. (6 Marks)

d) State three possible reasons why the fixed overheads for September in ABC Company were lower than budgeted. (3 Marks)

e) ABC Company operates a system of a 50% mark-up on cost to determine the selling price. The cost of producing each item has risen in September 2019. Evaluate whether ABC Company should continue with a mark-up on cost of 50%. (7 Marks)

Answer 1

Answer

a)

i) Following is the standard cost of one Hemz Rose Sharbat bottle

Particulars	Amount in $
Boiling department labour cost ($7.2/60 min*15 min)	1.80
Packing department labour cost ($7.2/60 min*30 min)	3.60
Material cost (2.5*$ 3.46)	8.65
Fixed overheads ($17000/20000)	0.85
Total cost for one Hemz Rose Sharbat bottle	14.90

a) ii) Following is the working of actual cost of 20,000 Hemz Rose Sharabat Bottle   

Particulars	Amount in $
Boiling department labour cost ($7.2/60 min*15 min*10000) + (($7.2*105%)/60 min*15 min*10000)	37,687.50
Packing department labour cost ($7.2/60 min*30 min*20000) + (850hrs*$7.2 for extra hours)	78,120.00
Material cost (2.5*20000*$ 3.56)	1,78,000.00
Fixed overheads	15,730.00
Total cost for 20,000 Hemz Rose Sharbat bottle	3,09,537.50

a) iii) Actual cost of one Hemz Rose Sharabat Bottle = $ 309,537.50/20000 = $ 15.48

b) iv) Calculation of labour rate variance which is in boiling department for half of the month

Actual hours * Actual rate - Actual hours * Standard rate

2,500 (i.e. 10,000*15/60)* $ (7.56 - 7.2) = $ 900

b) v) Labour efficiency variance is calculated as the difference between the number of direct labour hours budgeted and the actual hours employees work

Number of labour hours budgeted = 5000 hours of Boiling department + 2,500 hours of packing department i.e. 7,500 hours

Actual labour hour spent = 5000 hours of Boiling department + 3,350 hours of packing department i.e. 8,350 hours

Labour efficiency variance = 8,350 - 7,500 hours i.e. 850 hours

b) vi) Calculation of total Labour variance

Total actual labour cost for 20,000 Hemz Rose Sharbat Bottle is $ (37,687.50 + 78,120.00) i.e. $ 115,807.50

Budgeted labour cost for 20,000 Hemz Rose Sharbat Bottle is $ (1.8 + 3.6)*20000 i.e. $ 108,000

Total Labour variance is $ (115,807.50 - 108,000.00) i.e. $ 7,807.50

b) vii) Material price variance is calculated as follows:

Price variance = (Actual unit cost - Standard unit cost) * Actual Quantity Purchased)

Price variance = ($3.56 - $3.46) per litre * (20,000*2.5 litres)

Material Price variance = $ 5,000

c) Total budgeted cost = Total cost per unit * No. of quantity i.e. $ 14.90 (refer above for working) * 20000 = $ 298,000

    Total actual cost = $ 309,537.50

    Unfavourable variance = $ 309,537.50 - $ 298,000 = $ 11,537.50

d) Possible reason for decrease in overhead is :

1) Fixed overhead is calculated for the month but the output is for four week and not full month

2) Due to difference in actual and budgeted hours absorption rate

3) Due to difference in budgeted and actual fixed cost

e) Total budgeted selling price of one bottle considering 50% mark-up on cost will be $ 22.35 per bottle (i.e. $14.90*150%)

Total actual selling price of one bottle considering 50% mark-up on cost will be $ 23.22 per bottle (i.e. $ 15.48*150%)

From the above it is clear that, selling price of the product will increase if Company maintain 50% mark-up on cost due to which demand of the product in the market may be impacted due to competition. So it is not possible for the Company to maintain 50% mark-up on cost due to increase in cost of production other wise sale may decline.