5.1 ORINOCO S.L.

ORINOCO S.L. manufactures and sells two products: CIF and FOB to which the
following standards apply:

Raw materials required and standard prices

M.P. UNIT PRICE (IN €)

A kilo 60
B Piece 12
C Litre 50

The standard quantities of raw materials required for the

manufacture of the products are shown below:

Required for product CIF (per unit)

Raw material D.L. (Direct Labour)

Operation
Type Quantity Hours
1 A 3 15
2 B 1 5
3 C 20 25

Required for product FOB (per unit)

Raw material D.L. (Direct Labour)

Operation
Type Quantity Hours
1 A 4 20
2 B 1 5
3 C 10 15

The indirect manufacturing costs are standardized as 175% of total Direct Labour.

The actual data for the period under consideration was as

follows:

- Production begun and completely finished.

FOB 1,000 units CIF 1,000 units

- Actual time and materials consumed:

 CIF FOB
Raw material D.L. Raw material D.L.
Operation
Type Quantity Hours Type Quantity Hours
1 A 3,150 15,500 A 4,200 20,700
2 B 1,020 5,000 B 1,018 5,000
3 C 19,980 23,600 C 9,960 14,450

The following raw materials were purchased during the period:

PRODUCT QUANTITY TOTAL COST

A 7,500 kilos 435,000

B 2,200 pieces 22,000
C 40,000 litres 1,920,000

At the end of the period the closing stock comprised the items below:

Product A 150 kilos

Product B 162 pieces
Product C 10,060 litres

The total cost of Direct Labour was 2,738,125 € and was priced the same for all
operations,(Standard cost =€ 35 per hour).

Indirect manufacturing costs of €4,500,000 were incurred.

Bearing in mind that everything manufactured was sold and that the sale prices
were:

CIF: €6,000 per unit

FOB: €5,500 per unit

1. Produce separate information sheets on the standard cost of the CIF and
FOB products.

2. Establish the Material Deviation Calculations (quantity and price); Direct

Labour (salary and efficiency), and Indirect Manufacturing Costs.

3. Produce an account for the financial year.

5.2 Computation of labour and material variances and reconciliation
statements

Malton Ltd operates a standard marginal costing system. As the recently

appointed management accountant to Malton’s Eastern division, you have
responsibility for the preparation of that division’s monthly cost reports. The
standard cost report uses variances to reconcile the actual marginal cost of
production to its standard cost.

The Eastern division is managed by Richard Hill. The division only makes one
product, the Beta. Budgeted Beta production for May was 8000 units, although
actual production was 9500 units.

In order to prepare the standard cost report for May, you have asked a member
of your staff to obtain standard and actual cost details for the month of May.
This information is reproduced below:

Unit standard cost Actual details for May

Quantity Unit Cost per Quantity Total
price Beta (£) cost (£)
Material 8 litres £20 160 Material 78 000 litres 1 599 000
Labour 4 hours £6 24 Labour 39 000 hours 249 600
184 1 848 600

Task 1
(a) Calculate the following:
(i) ) the material price variance;
(ii) the material usage variance;
(iii) ur rate variance;
(iv) our efficiency variance (sometimes called the utilization
variance); (b)

Prepare a standard costing statement reconciling the actual marginal cost of

production with the standard marginal cost of production.

After Richard Hill has received your standard costing statement, you visit him to
discuss the variances and their implications. Richard, however, raises a number
of queries with you. He makes the following points:

• An index measuring material prices stood at 247.2 for May but at 240.0
when the standard for the material price was set.
• The Eastern division is budgeted to run at its normal capacity of 8000
units of production per month, but during May it had to manufacture an
additional 1500 Betas to meet a special order agreed at short notice by
Melton’s sales director.
• Because of the short notice, the normal supplier of the raw material was
unable to meet the extra demand and so additional materials had to be
acquired from another supplier at a price per litre of £22.
 • This extra material was not up to the normal specification, resulting in
20% of the special purchase being scrapped prior to being issued to
production.
• The work force could only produce the special order on time by working
overtime on the 1500 Betas at a 50% premium.

Task 2
(a) Calculate the amounts within the material price variance, the material
usage variance and the labour rate variance which arise from producing
the special order.

(b) (i) Estimate the revised standard price for materials based on the change
in the material price index.
(ii)For the 8000 units of normal production, use your answer in (b) (i) to
estimate how much of the price variance calculated in Task 1 is caused
by the general change in prices.

(c) Using your answers to parts (a) and (b) of this task, prepare a revised
standard costing statement. The revised statement should subdivide the
variances prepared in Task 1 into those elements controllable by Richard
Hill and those elements caused by factors outside his divisional control.

(d) Write a brief note to Richard Hill justifying your treatment of the elements
you believe are outside his control and suggesting what action should be
taken by the company.
5.3 Reconciliation of actual and budgeted profit (including overhead
variances)

A local restaurant has been examining the profitability of its set menu. At the
beginning of the year the selling price was based on the following predicted
costs:
(£)
Starter Soup of the day
100 grams of mushrooms 0.30
@ £3.00 per kg
Cream and other ingredients 0.20
Main course Roast beef
Beef 0.10 kg 1.50
@ £15.00 per kg
Potatoes 0.2 kg 0.05
@ £0.25 per kg
Vegetables 0.3 kg 0.27
@ £0.90 per kg
Other ingredients and
accompaniments 0.23
Dessert Fresh tropical fruit salad
Fresh fruit 0.15 kg 0.45
@ £3.00 per kg

The selling price was set at £7.50, which produced an overall gross profit of
60%.

During October the number of set menus sold was 860 instead of the 750
budgeted: this increase was achieved by reducing the selling price to £7.00.
During the same period an analysis of the direct costs incurred showed:

(£)
90 kg of mushrooms 300
Cream and other ingredients 160
70 kg of beef 1148
180 kg of potatoes 40
270 kg of vegetables 250
Other ingredients and accompaniments 200
140 kg of fresh fruit 450

There was no stock of ingredients at the beginning or end of the month.

Requirements:
(a) Calculate the budgeted profit for the month of October.
(b) Calculate the actual profit for the month of October.
(c) Prepare a statement which reconciles your answers to (a) and (b) above,
showing the variances in as much detail as possible.
(d) Prepare a report, addressed to the restaurant manager, which identifies the
two most significant variances, and comments on their possible causes.