Topic: Standard Costing and Variance Analysis

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PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

Question

GOODLAND Limited produces and sells a single product. The company adopts a standard absorption costing system and absorbs overheads on the basis of direct labour hours. Presented below are the standard cost details and selling price for a single unit of the product:

It has been estimated that the production and sales for the month would be 2,000 units. However, the estimated production for the month has been used as a basis for determining the fixed overhead absorption rate.

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

Answer

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Tags: Absorption Costing, Overhead Variance, Profit reconciliation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – Nov 2014 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate various cost and sales variances, including an operating statement for Ibek Limited.

Question

Ibek Limited manufactures a standard product and operates a system of variance accounting using a fixed budget.

As a newly appointed Management Accountant, you are responsible for preparing the monthly operating statements.

Extracts from the budget for the standard product cost and actual data for the month ended 31 December 2013 are given below:

Budgeted and Standard Cost Data:

Budgeted sales and production for the month: 20,000 units
Standard cost for each unit of product:

Item	Details
Direct materials:	A: 10 kg at N2 per kg
	B: 5 kg at N10 per kg
Direct wages	5 hours at N6 per hour
Fixed overhead	Absorbed at 200% of direct wages

Budgeted sales price has been calculated to give a margin of 20% of sales price.

Actual Data for the Month Ended 31 December 2013:

Production: 19,000 units sold at a price of 15% higher than that budgeted
Direct materials consumed:

Item	Quantity	Cost per kg
Material A	192,000 kg	N2.40
Material B	96,000 kg	N9.40

Direct wages incurred: 92,000 hours at N6.40 per hour
Fixed production overhead incurred: N580,000

Required:

(a) Prepare the operating statement for the month ended 31 December 2013. (3 Marks)

(b) Calculate the following variances: i. Direct material cost variance (5 Marks)
ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)

Answer

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Tags: Labour Variance, Material Variance, Operating Statements, Overhead Variance, Sales Variance, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – May 2017 – L2 – SA – Q6 – Standard Costing and Variance Analysis

Advise on optimal replacement timing for AL Limited's machine based on cost-benefit analysis.

Question

AL Limited, a manufacturing company based in Aba, produces a popular mortar coloring agent called Hadtone. Hadtone is packaged in five-litre cartons, sold at ₦300 each. Estimated maximum annual demand is 300,000 cartons, justifying one processing machine, replaced every three years though it has a four-year productive life.

Machine Details: Initial productive capacity aligns with maximum demand, decreasing by 15,000 units per annum. Maintenance costs in year one are ₦300,000, rising by ₦50,000 each subsequent year. Variable costs per carton (excluding maintenance) are ₦200.
Machine Depreciation: Straight-line method. Sale proceeds after one year are ₦8,000,000, reducing by ₦3,000,000 each following year.
Machine Cost Increase: Recent machine cost rise to ₦12,000,000 prompts reconsideration of replacement policy to optimize cash flow. Assume all costs/revenues except initial payment occur year-end; initial cost paid at purchase.

Requirements:

a. Calculate replacement frequency based on maximum capacity usage, including supporting calculations. Assume a 10% cost of capital. (12 Marks)

b. Itemize key assumptions made in the calculations. (3 Marks)

Answer

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Tags: Cash Flow, Cost of Capital, Depreciation, Replacement Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – May 2017 – L2 – SA – Q4 – Standard Costing and Variance Analysis

Calculate budgeted profit and perform variance analysis for Dabens Nigeria's job costing system.

Question

Dabens Nigeria Limited’s job costing system includes two direct cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products based on standard direct manufacturing labor hours (SDMLH). At the beginning of 2016, Dabens adopted the following standards for manufacturing costs and sales:

S/N	Cost Details	Input	Cost per Output Unit (N)
1	Direct Materials	3 kg at N500	1,500
2	Direct Manufacturing Labor	5 hours at N200	1,000
3	Manufacturing Overhead: Variable	N120 per SDMLH	600
	Manufacturing Overhead: Fixed	N160 per SDMLH	800
4	Unit Manufacturing Cost		3,900
5	Standard Profit Margin		1,300
6	Standard Selling Price		5,200

The denominator level for total manufacturing overhead per month in 2016 is 40,000 direct manufacturing labor hours. Dabens’ flexible budget for January 2016 was based on this denominator level. January records show the following data:

Direct materials purchased: 25,000 kg at N520 per kg
Direct materials used: 23,100 kg
Direct manufacturing labor: 40,100 hours at N190 per hour
Total actual manufacturing overhead (fixed and variable): N12,000,000
Actual production/sales: 7,800 output units
Actual selling price: N5,350

The proportion of actual variable and fixed overhead costs is consistent with the standard.

Required:

a. Calculate the budgeted profit of the company for January 2016.
(2 Marks)

b. Calculate the following variances for January 2016:

i. Direct material variances
ii. Direct manufacturing labor variances
iii. Variable manufacturing overhead variances
iv. Fixed manufacturing overhead variances
v. Sales variances
(10 Marks)

c. Prepare a statement reconciling the actual profit with the budgeted profit.
(8 Marks)

Answer

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Tags: Budgeted profit, Cost Variance, Standard Costing, Variance Calculation
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – Nov 2015 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material, labour, and variable overhead variances, and discuss causes for variances in KOMERE Limited’s cost system.

Question

KOMERE Limited operates a Standard Costing System. Below are the standard and actual costs for October 2015:

Standard Cost Information:

Direct Material:

A: 20 kg at N100 per kg = N2,000
B: 30 kg at N80 per kg = N2,400

Direct Labour:

Skilled: 10 hours at N40 per hour = N400
Unskilled: 10 hours at N25 per hour = N400

Variable Overhead Cost:

10 hours at N20 per hour = N200

Total Standard Cost per unit = N5,250

Actual Results:

Direct Material:
- Material A: 105,000 kg purchased at N10,290,000; 99,000 kg consumed
- Material B: 148,000 kg purchased at N11,988,000; 144,000 kg consumed
Direct Labour:
- Skilled Labour: 56,000 hours at N2,352,000
- Unskilled Labour: 56,000 hours at N1,344,000
Variable Overhead: N1,064,000
Actual Production: 4,800 units

Required:

(a) Calculate all the relevant variances. (8 Marks)

(b) What are possible causes of the variances computed? (7 Marks)

Answer

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Tags: Direct Labour Variances, Direct Material Variances, Standard Costing, Variable Overhead Variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Question

Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:

The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

Answer

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Tags: Material Price Variances, Material Usage Variances, Operational Variances, Planning Variances, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

PM – NOV 2016 – L2 – Q5 – Standard Costing and Variance Analysis

Question tests calculation and interpretation of material price, usage, mix and yield variances for a petroleum additive manufacturer.

Question

Okeke and Sons produces a new petroleum additive called ‘EPBC’ used in increasing petrol engine efficiency, while at the same time reducing its fuel consumption. The actual and budgeted quantities in litres of materials required to produce ‘EPBC’ and the budgeted prices of materials in October 2016 are as follows:

You are required to:

a. Calculate the individual chemical and total direct materials price and usage variances for October 2016. (4 Marks)

b. Calculate the individual chemical and total direct materials yield and mix variances for October 2016. (4 Marks)

c. What conclusions would you draw from the various variances calculated in (a) and (b) above? (4 Marks)

d. State ONE possible cause of each of the variances computed in (a) and (b) above. (3 Marks)

Answer

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Tags: Cost Variances, Material variances, mix variance, Price Variance, Usage Variance, yield variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2016

PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

Question

Toma Paste Nigeria Limited produces tomato paste which serves as an alternative for an immediate stew for working mothers instead of using fresh tomatoes. For the forthcoming period, the company’s budgeted fixed costs were ₦600,000 and budgeted production and sales were 13,000 units.

The product has the following standard cost:

Description	Cost (N)
Selling price	500
Materials: 5kg @ ₦40/kg	200
Labour: 3hrs @ ₦40/hr	120
Variable overheads: 3hrs @ ₦30/hr	90

Actual results for the period were:

11,000 units were made and sold, earning revenue of ₦5,720,000.
66,000 kg of materials were bought at a cost of ₦2,970,000, but only 63,000 kg were used.
36,000 hours of labour were paid for at a cost of ₦1,422,000.
The total cost for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.

The company uses marginal costing and values all inventory at standard cost.

Required:
a. Prepare a statement reconciling actual and budgeted profit using appropriate variances. (12 Marks)
b. Recalculate the fixed production overhead variances, assuming the company uses absorption costing. (4 Marks)
c. Discuss possible causes for the labour variances you have calculated. (4 Marks)

Answer

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Tags: Absorption Costing, Labour Variance, Marginal Costing, Profit reconciliation, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

PM – May 2019 – L2 – Q1 – Standard Costing and Variance Analysis

Analyze variances, reconcile budgeted and actual profit, and evaluate pricing strategy success for KK Plc.

Question

KK Plc. buys small tablet computers which it customizes for the Nigerian market and then resells to electronics retailers. Although a detailed variance analysis is carried out each month, the CEO John, T, has become concerned that no one has a clear responsibility for taking action in response to this analysis or for using it to carry out an ex-post analysis of the outcome of important decisions.

The following is an extract from last month’s budget:

Model	A	B	C
Selling price/unit (N)	1,000	1,250	1,500
Variable cost/unit (N)	400	500	600
Sales (units)	25,000	40,000	15,000

The budgeted fixed costs were N12,500,000 for the month, which were not dependent on the mix or quantities of products sold. When the budget was being prepared, it was estimated that the total size of the market (including sales by the company and the competitors) would be 400,000 units.

Shortly after the beginning of the month, the marketing director, Okon Nelson, decided that a change of pricing strategy was necessary in response to the recessionary economic conditions. The price of Model A was reduced by 10%, and the prices of Models B and C were each reduced by 20%. The company was partly successful in passing on the impact of these price reductions to its suppliers, and as a consequence, the variable cost per unit for all three models was reduced by 5%. Actual fixed costs were 5% higher than budgeted because of the marketing costs associated with publishing the price reductions.

As a result of the recessionary conditions, the actual total market size was just 200,000 units. The actual quantities sold by the company were as follows:

Actual quantities sold by the company were as follows:

Model	Sales (units)
A	14,800
B	29,500
C	11,700

Required:
a. Present a comprehensive analysis of variances, reconciling the budgeted and actual profit for last month in as much detail as possible from the information provided. (25 Marks)
b. Evaluate the financial success (or otherwise) of the decision to change the pricing strategy and assess whether the difference between the budgeted and actual performance was attributable mainly to luck or to factors within the company’s control. (5 Marks)

Answer

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Tags: Budget profit, Cost Analysis, Fixed Overhead, Market Share, Price Variance, Pricing Strategy, Profit reconciliation, Sales quantity, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2019

MA – Aug 2022 – L2 – Q5a – Standard costing and variance analysis

This question involves calculating the total hiring charge, running cost per kilometer, and effective transport charge for Carriers Private Ltd.

Question

Carriers Private Ltd (CPL) was recently formed with the objective of providing sand transport services. It purchased 10 Sand Trucks with a capacity of 5 cubic metres each at a cost of GH¢150,000 per Truck. The monthly running costs and other information have been forecasted as follows:

CPL expects each truck to run 5,000 kilometers a month during its lifetime of 4 years, which starts from the date of purchase. Out of the kilometers run each month, 50% is assumed to be by the empty truck that does not generate any revenue. At the end of year 4, each truck could be sold at an estimated consideration equivalent to 30% of the purchase cost.
The following salaries will be paid to workers in CPL:
- A driver would be paid GH¢700 per month. 11 drivers will be recruited, including a stand-by driver to replace a driver taking a leave.
- A cleaner would be paid GH¢500 per month and 11 cleaners will be recruited.
- Three office staff would be paid GH¢3,000 per month.
- A garage worker would be paid GH¢500 per month.
- Licensing and insurance per annum would be GH¢2,400.
- Servicing, repairs, and maintenance would be GH¢2 per running kilometer.
- The current fuel price per litre is GH¢7.30, and management expects to keep a leeway of 10% for inflationary adjustments. The empty truck could run 5 kilometers per litre, and when loaded could only run 3.25 kilometers per litre of fuel.

CPL expects to keep a profit mark-up of 30% on full cost.

Required:
i) Calculate the total hiring charge.
(6 marks)

ii) Determine the running cost for a month per kilometer.
(1.5 marks)

iii) Assess the effective transport charge for a month:

Per kilometer.
(1.5 marks)
Per cubic metre-kilometer.
(2 marks)

iv) Explain the importance of each cost unit in part iii) above, when applying them in different transport jobs.

Answer

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Tags: Cost Unit, Hiring Charge, Running Costs, Service Costing, Transport Costing
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: AUG 2022

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

Question

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

Answer

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Tags: Absorption Costing, Overhead Variance, Profit reconciliation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – Nov 2014 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate various cost and sales variances, including an operating statement for Ibek Limited.

Question

Ibek Limited manufactures a standard product and operates a system of variance accounting using a fixed budget.

As a newly appointed Management Accountant, you are responsible for preparing the monthly operating statements.

Extracts from the budget for the standard product cost and actual data for the month ended 31 December 2013 are given below:

Budgeted and Standard Cost Data:

Budgeted sales and production for the month: 20,000 units
Standard cost for each unit of product:

Item	Details
Direct materials:	A: 10 kg at N2 per kg
	B: 5 kg at N10 per kg
Direct wages	5 hours at N6 per hour
Fixed overhead	Absorbed at 200% of direct wages

Budgeted sales price has been calculated to give a margin of 20% of sales price.

Actual Data for the Month Ended 31 December 2013:

Production: 19,000 units sold at a price of 15% higher than that budgeted
Direct materials consumed:

Item	Quantity	Cost per kg
Material A	192,000 kg	N2.40
Material B	96,000 kg	N9.40

Direct wages incurred: 92,000 hours at N6.40 per hour
Fixed production overhead incurred: N580,000

Required:

(a) Prepare the operating statement for the month ended 31 December 2013. (3 Marks)

(b) Calculate the following variances: i. Direct material cost variance (5 Marks)
ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)

Answer

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Tags: Labour Variance, Material Variance, Operating Statements, Overhead Variance, Sales Variance, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – May 2017 – L2 – SA – Q6 – Standard Costing and Variance Analysis

Advise on optimal replacement timing for AL Limited's machine based on cost-benefit analysis.

Question

Machine Details: Initial productive capacity aligns with maximum demand, decreasing by 15,000 units per annum. Maintenance costs in year one are ₦300,000, rising by ₦50,000 each subsequent year. Variable costs per carton (excluding maintenance) are ₦200.
Machine Depreciation: Straight-line method. Sale proceeds after one year are ₦8,000,000, reducing by ₦3,000,000 each following year.
Machine Cost Increase: Recent machine cost rise to ₦12,000,000 prompts reconsideration of replacement policy to optimize cash flow. Assume all costs/revenues except initial payment occur year-end; initial cost paid at purchase.

Requirements:

a. Calculate replacement frequency based on maximum capacity usage, including supporting calculations. Assume a 10% cost of capital. (12 Marks)

b. Itemize key assumptions made in the calculations. (3 Marks)

Answer

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Tags: Cash Flow, Cost of Capital, Depreciation, Replacement Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – May 2017 – L2 – SA – Q4 – Standard Costing and Variance Analysis

Calculate budgeted profit and perform variance analysis for Dabens Nigeria's job costing system.

Question

S/N	Cost Details	Input	Cost per Output Unit (N)
1	Direct Materials	3 kg at N500	1,500
2	Direct Manufacturing Labor	5 hours at N200	1,000
3	Manufacturing Overhead: Variable	N120 per SDMLH	600
	Manufacturing Overhead: Fixed	N160 per SDMLH	800
4	Unit Manufacturing Cost		3,900
5	Standard Profit Margin		1,300
6	Standard Selling Price		5,200

Direct materials purchased: 25,000 kg at N520 per kg
Direct materials used: 23,100 kg
Direct manufacturing labor: 40,100 hours at N190 per hour
Total actual manufacturing overhead (fixed and variable): N12,000,000
Actual production/sales: 7,800 output units
Actual selling price: N5,350

The proportion of actual variable and fixed overhead costs is consistent with the standard.

Required:

a. Calculate the budgeted profit of the company for January 2016.
(2 Marks)

b. Calculate the following variances for January 2016:

i. Direct material variances
ii. Direct manufacturing labor variances
iii. Variable manufacturing overhead variances
iv. Fixed manufacturing overhead variances
v. Sales variances
(10 Marks)

c. Prepare a statement reconciling the actual profit with the budgeted profit.
(8 Marks)

Answer

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Tags: Budgeted profit, Cost Variance, Standard Costing, Variance Calculation
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – Nov 2015 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material, labour, and variable overhead variances, and discuss causes for variances in KOMERE Limited’s cost system.

Question

KOMERE Limited operates a Standard Costing System. Below are the standard and actual costs for October 2015:

Standard Cost Information:

Direct Material:

A: 20 kg at N100 per kg = N2,000
B: 30 kg at N80 per kg = N2,400

Direct Labour:

Skilled: 10 hours at N40 per hour = N400
Unskilled: 10 hours at N25 per hour = N400

Variable Overhead Cost:

10 hours at N20 per hour = N200

Total Standard Cost per unit = N5,250

Actual Results:

Direct Material:
- Material A: 105,000 kg purchased at N10,290,000; 99,000 kg consumed
- Material B: 148,000 kg purchased at N11,988,000; 144,000 kg consumed
Direct Labour:
- Skilled Labour: 56,000 hours at N2,352,000
- Unskilled Labour: 56,000 hours at N1,344,000
Variable Overhead: N1,064,000
Actual Production: 4,800 units

Required:

(a) Calculate all the relevant variances. (8 Marks)

(b) What are possible causes of the variances computed? (7 Marks)

Answer

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Tags: Direct Labour Variances, Direct Material Variances, Standard Costing, Variable Overhead Variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Question

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

Answer

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Tags: Material Price Variances, Material Usage Variances, Operational Variances, Planning Variances, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

PM – NOV 2016 – L2 – Q5 – Standard Costing and Variance Analysis

Question tests calculation and interpretation of material price, usage, mix and yield variances for a petroleum additive manufacturer.

Question

You are required to:

a. Calculate the individual chemical and total direct materials price and usage variances for October 2016. (4 Marks)

b. Calculate the individual chemical and total direct materials yield and mix variances for October 2016. (4 Marks)

c. What conclusions would you draw from the various variances calculated in (a) and (b) above? (4 Marks)

d. State ONE possible cause of each of the variances computed in (a) and (b) above. (3 Marks)

Answer

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Tags: Cost Variances, Material variances, mix variance, Price Variance, Usage Variance, yield variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2016

PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

Question

The product has the following standard cost:

Description	Cost (N)
Selling price	500
Materials: 5kg @ ₦40/kg	200
Labour: 3hrs @ ₦40/hr	120
Variable overheads: 3hrs @ ₦30/hr	90

Actual results for the period were:

11,000 units were made and sold, earning revenue of ₦5,720,000.
66,000 kg of materials were bought at a cost of ₦2,970,000, but only 63,000 kg were used.
36,000 hours of labour were paid for at a cost of ₦1,422,000.
The total cost for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.

The company uses marginal costing and values all inventory at standard cost.

Answer

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Tags: Absorption Costing, Labour Variance, Marginal Costing, Profit reconciliation, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

PM – May 2019 – L2 – Q1 – Standard Costing and Variance Analysis

Analyze variances, reconcile budgeted and actual profit, and evaluate pricing strategy success for KK Plc.

Question

The following is an extract from last month’s budget:

Model	A	B	C
Selling price/unit (N)	1,000	1,250	1,500
Variable cost/unit (N)	400	500	600
Sales (units)	25,000	40,000	15,000

As a result of the recessionary conditions, the actual total market size was just 200,000 units. The actual quantities sold by the company were as follows:

Actual quantities sold by the company were as follows:

Model	Sales (units)
A	14,800
B	29,500
C	11,700

Answer

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Tags: Budget profit, Cost Analysis, Fixed Overhead, Market Share, Price Variance, Pricing Strategy, Profit reconciliation, Sales quantity, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2019

MA – Aug 2022 – L2 – Q5a – Standard costing and variance analysis

This question involves calculating the total hiring charge, running cost per kilometer, and effective transport charge for Carriers Private Ltd.

Question

CPL expects each truck to run 5,000 kilometers a month during its lifetime of 4 years, which starts from the date of purchase. Out of the kilometers run each month, 50% is assumed to be by the empty truck that does not generate any revenue. At the end of year 4, each truck could be sold at an estimated consideration equivalent to 30% of the purchase cost.
The following salaries will be paid to workers in CPL:
- A driver would be paid GH¢700 per month. 11 drivers will be recruited, including a stand-by driver to replace a driver taking a leave.
- A cleaner would be paid GH¢500 per month and 11 cleaners will be recruited.
- Three office staff would be paid GH¢3,000 per month.
- A garage worker would be paid GH¢500 per month.
- Licensing and insurance per annum would be GH¢2,400.
- Servicing, repairs, and maintenance would be GH¢2 per running kilometer.
- The current fuel price per litre is GH¢7.30, and management expects to keep a leeway of 10% for inflationary adjustments. The empty truck could run 5 kilometers per litre, and when loaded could only run 3.25 kilometers per litre of fuel.

CPL expects to keep a profit mark-up of 30% on full cost.

Required:
i) Calculate the total hiring charge.
(6 marks)

ii) Determine the running cost for a month per kilometer.
(1.5 marks)

iii) Assess the effective transport charge for a month:

Per kilometer.
(1.5 marks)
Per cubic metre-kilometer.
(2 marks)

iv) Explain the importance of each cost unit in part iii) above, when applying them in different transport jobs.

Answer

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Tags: Cost Unit, Hiring Charge, Running Costs, Service Costing, Transport Costing
Level: Level 2