Topic: Management accounting question

Question 2

Sycamore Ltd manufactures and sells product Z at £50 each. The standard (budgeted) variable production cost of product Z is £20 per unit and the fixed production overhead (Overhead Absorption Rate) is £4 per unit.

In addition to the above, each sales unit incurs a selling and distribution cost of £2 per unit. Fixed selling and distribution costs are £10,000 monthly.    

For the months of January to March 2020, actual production and sales units and actual fixed production overhead were as follows:

JanuaryFebruaryMarch
Sales (units)4,0004,2003,800
Production (units)4,5004,2003,600
Actual fixed production overhead (£)£18,000£16,000£15,000

All other costs were as per the standard (budget), including the selling and administration costs. Inventory level of product Z at 1st of January was zero.

REQUIRED

  • Prepare for each of the 3 months profit statements using both absorption costing principles and marginal costing principles.                                                                                                                                               [15 marks]

                                                                                                                                                                   [10 marks]

Question 3

Somnath Ltd manufactures and sells product G. The company operates a standard marginal costing system, and the standard variable cost of production and selling price of product G is provided in the table below.

£ per unit£ per unit
Selling price130
Variable production costs
Direct Material A (£4 per kg)24
Direct Material B (£8 per litre)16
Direct Labour (£9 per hour)45
Production overhead (£3 per hour)15
Total variable costs(100)
Contribution30

The variable production overhead is incurred in direct proportion to the direct labour hours worked and budgeted fixed manufacturing overheads are £1,200,000 annually.

In June 2020, Somnath Ltd budgeted to produce and sell 15,000 units of product G.The finance director projected a profit forecast of £350,000 for the month based on these sales level.

In June 2020 however, actual production and sales were 15,500 units and a profit of £417,125 was recorded. There were no inventories at the beginning and at the end the month.

The production and purchasing department managers stated that because of their hard work, they have been able to keep costs down and this is reflected in the increased profit for the company. They said they that they deserve to be rewarded with a bonus for their contribution to the increased profits.   

The CEO of the company asked the management accountant to produce the actual profit statement for June 2017, which is provided below:

££
Sales Revenue (15,500 units)2,480,000
Variable production costs
Direct Material A (100,750 kgs)453,375
Direct Material B (46,500 litres)418,500
Direct Labour (93,000 hours)744,000
Production overhead (93,000 hours)372,000
Total variable costs(1,987,875)
Contribution492,125
Fixed Cost(75,000)
Profit417,125

Required

The variances that you are expected to calculate are:

You should state clearly whether a variance is favourable (F) or adverse (A).                                                                                                                                                             [11 marks]

  • Write a report to the CEO of Somnath Ltd evaluating the production and purchasing department managers claim that they have been able to keep costs down and should receive a bonus for their hard work. Your report should include a discussion of possible reasons for the variances that you have calculated in part (a) and any recommendations for the organisation to consider for the future.  (Maximum of 800 words)                                                                                     [14 marks]

Type of serviceAcademic paper writing
Type of assignmentCoursework
SubjectAccounting
Pages / words2 / 550
Academic levelSophomore (College 2nd year)
Paper formatHarvard
Line spacingDouble
Language styleUK English

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