Question

“It certainly is nice to see that small variance on the income statement after all the trouble we have had lately in controlling the manufacturing costs,” said Maznah Hashim, Vice President of Hikmah Enterprise. “The RM12,250 overall manufacturing variance reported last period is well below the 3 per cent limit we have set for variances. We need to congratulate everybody on the job well done.” Hikmah enterprise produces and sells a single product. The standard cost card for the product follows: Standard Cost Card – Per unit Direct materials, 4 meters at RM 3.50 per meter RM14.00 Direct labour, 1.5 direct labour hours at RM 12.00 per DLH RM18.00 Variable overhead, 1.5 direct labour hours at RM 2.00 per DLH RM3.00 The following additional information is available for the year just completed: a. The company manufactured 20,000 units of product during the year. b. A total of 78,000 meters of material was purchased during the year at a cost of RM 3.75 per yard. All of this material was used to manufacture the 20,000 units. There was no beginning or ending inventories for the year. c. The company worked 32,500 direct labour-hours during the year at a cost of RM 11.80 per hour. d. Overhead is applied to products on the basis of standard direct labour hours. Data relating to manufacturing overhead costs are as follows: Budgeted direct labour hours (DLH) 25,000 DLH Actual variable overhead costs RM 68,250 Required: a. Compute the following variances i. Direct materials price and quantity variance for the year (4 marks) ii. Direct labour rate and efficiency variances for the year (3 marks) iii. The variable overhead rate and efficiency variances for the year (3 marks) Indicate whether each variance is favourable or unfavourable. Show all relevant computations. b. Discuss the possible causes for each of the variances that you calculated under requirement (a) Also, consider possible interactions between variances. (6 marks) c. Explain FOUR factors that should be considered in determining whether or not to investigate a variance. (4 marks)

Answer 1