Data You are employed as the assistant management accountant in the group accountant's office of Hampstead plc.

Question:

Data You are employed as the assistant management accountant in the group accountant's office of Hampstead plc. Hampstead recently acquired Finchley Ltd, a small company making a specialist product called the Alpha. Standard marginal costing is used by all the companies within the group and, from 1 August, Finchley Ltd will also be required to use standard marginal costing in its management reports. Part of your job is to manage the implementation of standard marginal costing at Finchley Ltd.
John Wade, the managing director of Finchley, is not clear how the change will help him as a manager. He has always found Finchley's existing absorption costing system sufficient. By way of example, he shows you a summary of its management accounts for the three months to 31 May. These are reproduced below.

John Wade is not convinced that standard marginal costing will help him to manage Finchley. 'My current system tells me all I need to know,' he said. 'As you can see, we are £99 800 below budget which is really excellent given that we lost production as a result of a serious machine breakdown.'
To help John Wade understand the benefits of standard marginal costing, you agree to prepare a statement for the three months ended 31 May reconciling the standard cost of production to the actual cost of production.
(a) Use the budget data to determine:
(i) The standard marginal cost per Alpha; and
(ii) The standard cost of actual Alpha production for the three months to 31 May.
(b) Calculate the following variances:
(i) Material price variance;
(ii) Material usage variance;
(iii) Labour rate variance;
(iv) Labour efficiency variance;
(v) Fixed overhead expenditure variance.
(c) Write a short memo to John Wade. Your memo should:
(i) Include a statement reconciling the actual cost of production to the standard cost of production;
(ii) Give two reasons why your variances might differ from those in his original management accounting statement despite using the same basic data;
(iii) Briefly discuss one further reason why your reconciliation statement provides improved management information.
Data
On receiving your memo, John Wade informs you that:
€¢the machine breakdown resulted in the workforce having to be paid for 12 000 hours even though no production took place;
€¢an index of material prices stood at 466.70 when the budget was prepared but at 420.03 when the material was purchased.
Task 2
Using this new information, prepare a revised statement reconciling the standard cost of production to the actual cost of production. Your statement should subdivide:
€¢both the labour variances into those parts arising from the machine breakdown and those parts arising from normal production; and
€¢the material price variance into that part due to the change in the index and that part arising for other reasons.
Data
Barnet Ltd is another small company owned by Hampstead plc. Barnet operates a job costing system making a specialist, expensive piece of hospital equipment.
Existing system
Currently, employees are assigned to individual jobs and materials are requisitioned from stores as needed. The standard and actual costs of labour and material are recorded for each job. These job costs are totaled to produce the marginal cost of production. Fixed production costs - including the cost of storekeeping and inspection of deliveries and finished equipment - are then added to determine the standard and actual cost of production. Any costs of remedial work are included in the materials and labour for each job.
Proposed system
Carol Johnson, the chief executive of Barnet, has recently been to a seminar on modern manufacturing techniques. As a result, she is considering introducing just-in-time stock deliveries and total quality management. Barnet would offer suppliers a long-term contract at a fixed price but suppliers would have to guarantee the quality of their materials.
In addition, she proposes that the workforce is organized as a single team with flexible work practices. This would mean employees helping each other as necessary, with no employee being allocated a particular job. If a job was delayed, the workforce would work overtime without payment in order for the job to be completed on time. In exchange, employees would be guaranteed a fixed weekly wage and time off when production was slack to make up for any
overtime incurred.
Cost of quality
Carol has asked to meet you to discuss the implications of her proposals on the existing accounting system. She is particularly concerned to monitor the cost of quality. This is defined as the total of all costs incurred in preventing defects plus those costs involved in remedying defects once they have occurred. It is a single figure measuring all the explicit costs of quality, that is, those costs collected within the accounting system.
Task 3
In preparation for the meeting, produce brief notes. Your notes should:
(a) Identify four general headings (or classifications) which make up the cost of quality;
(b) Give one example of a type of cost likely to be found within each category;
(c) Assuming Carol Johnson's proposals are accepted, state, with reasons, whether or not:
(i) A standard marginal costing system would still be of help to the managers;
(ii) It would still be meaningful to collect costs by each individual job;
(d) Identify one cost saving in Carol Johnson's proposals which would not be recorded in the existing costing system.