1. Anderson Ltd. manufacture gearboxes for use in cars. At the start of the year, the management of Anderson Ltd. estimated that its costs would be:

This was based on the following: 80 employees
2000 hours worked by each employee
40 000 gearboxes manufactured in the year as budgeted production
£200 unit selling price.

You have recently been employed by the company to establish a standard costing system. At the end of the year you were able to extract the following information:

- labour costs £4.40/hour
- 32 000 units sold
- £210/unit selling price
- 160 000 hours were worked
- variable production overheads were £640 000
- fixed production overheads were £810 000
- administration costs were £350 000
- raw material prices were 10% higher than expected
- total expenditure on raw material was £3.696 M
- there were no opening or closing stocks of raw materials.

(a) You are required to prepare an operating statement for the year, using a standard absorption costing system.

Calculations should proceed according to the following headings suffixing ‘A' for Adverse and ‘F' for Favourable where appropriate. Resulting quantities required for the statement are then entered in the ‘Operating Statement for the Year' sheet shown on page 6.

(All working must be shown.)

(Budgeted) Costs

Direct labour                                          Unit cost
                                                                    £

Direct materials

Variable overhead

Fixed overhead

Admin. overhead Total
Selling price

Standard profit (per unit) Budgeted profit

Sales price variance Sales quantity variance

(These last three entries are added to the ‘Operating Statement for the Year' on the final sheet of the calculations.)

Cost Variances Labour Variances Standard hours =

Standard cost/hour =

Rate variance =
Standard time =

Actual time =

Time variance = Efficiency variance =
(Add rate and efficiency variances to ‘Operating Statement for the Year' on the final sheet of the calculations.)

Material Variances

Material price =

Material usage - standard =
- actual

= Material usage variance =
(Add price and usage variances to ‘Operating Statement for the Year' on the final sheet of the calculations.)

Variable overheads Standard cost = Actual cost =
Expenditure variance = Efficiency variance =
(Add expenditure and efficiency variances to ‘Operating Statement for the Year' on the final sheet of the calculations.)

Fixed overheads Expenditure variance = Volume variance =
(Add these variances to ‘Operating Statement for the Year' on the final sheet of the calculations.)

Admin overhead (treat as fixed) Expenditure variance =
Volume variance =

(Add these variances to ‘Operating Statement for the Year' on the final sheet of the calculations.)

Operating Statement for the Year

                                               £'000                                 £'000

Budgeted Profit

Sales variance - price
- quantity

Cost variances

Labour - rate
- efficiency

Material - price
- usage

Variable - expenditure
- efficiency

Fixed - expenditure
- volume

Admin - expenditure
- volume

Actual Profit

(b) Give reasons/explanations why the variances in (a) above have occurred for the following:

(i) material price
(ii) labour efficiency
(iii) fixed overhead expenditure.

(c) The accountant suggests that a standard marginal costing system may be more suitable. He asks you to outline the strengths and weaknesses of both systems and recommend the most suitable.

(d) The Board of Anderson Ltd. want to adopt ‘ideal' standards because they feel it will encourage harder work. You are asked to produce a brief report giving your views.

2. (a) For the following categories of activities assign an appropriate cost driver from the list provided against each activity in TABLE 1.

Cost Drivers:

- Cost of Inspection/Test
- Machine use hours
- Direct Labour Hours
- Number of Purchase Orders
- Number of Production Runs
- Material Delivery/Invoices.

TABLE 1

(b) TABLE 2 shows the cost drivers, the quantity and unit cost of the cost driver, and total activity cost.

For two products A and B it is found that:

- The direct labour hours for products A and B are the same.

- It takes approximately four times as many machining hours in both cost centres to produce product B as product A.

- Product A requires one quarter of the materials purchased for B.

- Product A requires one third of the total Delivery notes/invoices.

- Product A has issued one third of the total materials issued per production run.

- Product A has issued one half of the planning per production run of that required by Product B.

- Product B requires twice as many machine set-ups as product A.

- The products have the same number of quality control inspections.

If the company produces 50 000 each of products A and B:

(i) Complete TABLE 2 to determine the cost driver unit costings in column 5 for the activities of column 1. Show also the product quantity splits in column 4 of each activity for product A and B (e.g. quantity of cost driver Activity Centre 1 is shown as split 100 000 product A and 400 000 product B).

(ii) Determine the overhead activity cost allocations to products A and B (using the activity proportions calculated in column 4) by completing TABLE 3.

(iii) Determine the total overhead allocations to products A and B.

(iv) Find the per unit product overhead cost allocations for each product.