Assignment-
Hepster Ltd makes quality wooden benches for both indoor and outdoor use. Results have been disappointing in recent years and a new managing director, Peter Williams, was appointed to raise production volumes. After an initial assessment Peter Williams considered that budgets had been set at levels which made it easy for employees to achieve. He argued that employees would be better motivated by setting budgets which challenged them more in terms of higher expected output.
Other than changing the overall budgeted output, Mr. Williams has not yet altered any part of the standard cost card. The budgeted output and sales for January 20X7 was 4,000 benches and the standard cost card below was calculated on this basis:
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$
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Wood
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25 kg at $3.40 per kg
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85.00
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Labour
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4 hours at $8.50 per hour
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34.00
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Variable overheads
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4 hours at $4 per hour
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16.00
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Fixed overhead
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4 hours at $16 per hour
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64.00
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199.00
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Selling price
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220.00
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Standard profit
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21.00
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Overheads are absorbed on the basis of labour hours and the company uses an absorption costing system.
Actual results for January 20X7 were as follows:
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Wood
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80,000 kg at $3.50
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Labour
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16,000 hours at $7
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Variable overheads
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$60,000
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Fixed overheads
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$196,000
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Sales
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3,200 benches at $225
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Total production during January 20X7 was 3,600 benches.
The average monthly production and sales for some years prior to January 20X7 has been 3,400 units and budgets had previously been set at this level. Very few operating variances had historically been generated by the standard costs used.
Mr. Williams has made some significant changes to the operations of the company. However, the other directors are now concerned that Mr. Williams has been too ambitious in raising production targets. Mr. Williams had also changed suppliers of raw materials to improve quality, increased selling prices, begun to introduce less skilled labour, and significantly reduced fixed overheads.
Required:
a. Prepare an operating statement for January 20X7. This should show all operating variances and should reconcile budgeted and actual profit for the month for Hepster Limited.
b. Suggest reasons why the variances may have occurred and explain any inter- relationship between them.
c. Identify the four different types of standards which could be used and the effects the choice would have on the variances calculated.
The suggested word limit is 1,500 words.