Plush pet toys are produced in a largely automated factory in standard lots of 100 toys...

Transcribed Image Text:

Plush pet toys are produced in a largely automated factory in standard lots of 100 toys each. A standard cost system is used to control costs and to assign cost to inventory. Price standard Plush fabric Direct labour $ 2 per metre $10 per hour Quantity standard 15 metres per lot 2 hours per lot Variable overhead, estimated at $5 per lot, consists of miscellaneous items such as thread, a variety of plastic squeakers, and paints that are applied to create features such as eyes and whiskers. Fixed overhead, estimated at $24000 per month, consists largely of depreciation on the automated machinery and rent for the building. Variable overhead is allocated based on lots produced. The standard fixed overhead allocation rate is based on the estimated output of 1000 lots per month. Actual data for last month follow. Production Sales Plush fabric purchased Cost of fabric purchased Fabric used 2400 lots 1600 lots 30 000 metres $62.000 34000 metres Direct labour 4200 hours Direct labour cost $39000 Variable overhead Fixed overhead $12000 $24920 The entity's policy is to record materials price variances at the time materials are purchased. Required (a) Calculate the commonly used direct cost and overhead variances. (b) Management is considering further automation in the factory. Robot-controlled forklifts could reduce the standard direct labour per lot to 1.5 hours. (i) Estimate the savings per lot that would be realised from this additional automation. (ii) Assume the entity would be able to generate the savings as calculated. Considering only quantitative factors, calculate the maximum price the managers would be willing to pay for the robot-controlled forklifts. Assume the entity's management requires equipment costs to be recovered in five years, ignoring the time value of money. Plush pet toys are produced in a largely automated factory in standard lots of 100 toys each. A standard cost system is used to control costs and to assign cost to inventory. Price standard Plush fabric Direct labour $ 2 per metre $10 per hour Quantity standard 15 metres per lot 2 hours per lot Variable overhead, estimated at $5 per lot, consists of miscellaneous items such as thread, a variety of plastic squeakers, and paints that are applied to create features such as eyes and whiskers. Fixed overhead, estimated at $24000 per month, consists largely of depreciation on the automated machinery and rent for the building. Variable overhead is allocated based on lots produced. The standard fixed overhead allocation rate is based on the estimated output of 1000 lots per month. Actual data for last month follow. Production Sales Plush fabric purchased Cost of fabric purchased Fabric used 2400 lots 1600 lots 30 000 metres $62.000 34000 metres Direct labour 4200 hours Direct labour cost $39000 Variable overhead Fixed overhead $12000 $24920 The entity's policy is to record materials price variances at the time materials are purchased. Required (a) Calculate the commonly used direct cost and overhead variances. (b) Management is considering further automation in the factory. Robot-controlled forklifts could reduce the standard direct labour per lot to 1.5 hours. (i) Estimate the savings per lot that would be realised from this additional automation. (ii) Assume the entity would be able to generate the savings as calculated. Considering only quantitative factors, calculate the maximum price the managers would be willing to pay for the robot-controlled forklifts. Assume the entity's management requires equipment costs to be recovered in five years, ignoring the time value of money.