Smithton, Inc. makes and sells one product, the standard costs of which are as follows:£Direct...

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Smithton, Inc. makes and sells one product, the standard costs of which are as follows:£Direct materials (2 kg at £3.00/kg)6.00Direct labour (30 minutes at £10.00/hr)5.00Fixed overheads2.50Total13.50Selling price20.00Standard profit margin6.50The monthly production and sales are planned to be 1,300 units.The actual results for May were as follows:£Sales revenue20,000Less: Direct materials(6,500) (2,100 kg)Direct labour(5, XXXXXXXXXXhr)Fixed overheads(3,100)Operating profit5,150There were no inventories at the start or end of May.Your supervisor has asked you to calculate the budgeted profit for May and then reconcile it to the actual profit through variances, going into as much detail as possible from the information available.Once you have the figures computed, prepare a detailed report for your supervisor that includes a discussion of the following information:A listing of the variances that occurred within the month of May.An analysis of the standards developed and utilised by the organisation.An analysis of each variance with regards to the possible explanations of why it occurred.An analysis of the business/strategic implications that exist for your organisation in light of the new information.

Robert · Accepted Answer

Computation of  budgeted profit 
 
Sales (1300 *20)     26000 
Less;  
Direct material (1300*6)    7800 
Direct wages(1300*5)    6500 
 Contribution     11700 
Less: 
Fixed overhead (1300*2.5)    3250 
 Budgeted profit     8450 
 
 
 
Standard rate : SR  
Actual rate : AR  
Standard hours : SH 
Actual hours : AH 
Actual quantity : AQ 
Standard quantity : SQ 
 
 
Material price variance : (SR-AR)AQ 
   : (3-3.1)2100 = 210 unfavourable 
 
material usage variance : ( SQ-AQ)SR 
   : (2600-2100)3 = 1500 favourable 
 
labour rate variance : (SR-AR)AH 
   : (10*510)-5250= 150 UNFAVOURABLE 
 
Labour efficiency variance : (SH-AH) SR 
    :

Smithton, Inc. makes and sells one product, the standard costs of which are as follows: £ Direct materials (2 kg at £3.00/kg) 6.00 Direct labour (30 minutes at £10.00/hr) 5.00 Fixed overheads 2.50...

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£
Direct materials (2 kg at £3.00/kg)	6.00
Direct labour (30 minutes at £10.00/hr)	5.00
Fixed overheads	2.50
Total	13.50
Selling price	20.00
Standard profit margin	6.50

£
Sales revenue	20,000
Less: Direct materials	(6,500) (2,100 kg)
Direct labour	(5, XXXXXXXXXXhr)
Fixed overheads	(3,100)
Operating profit	5,150