Chaff Co. processes and sells brown rice. It buys unprocessed

Chaff Co. processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple process, removes the outer husk of the rice to produce the brown rice. This means that there is substantial loss of weight in the process. The market for the purchase of seeds and the sales of brown rice has been, and is expected to be, stable. Chaff Co. uses a variance analysis system to monitor its performance.

There has been some concern about the interpretation of the variances that have been calculated in month 1:

1. The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely and saved the company thousands of dollars in purchase costs by buying the required quantity of cheaper seeds from a new supplier.

2. The production director is upset at being criticized for increasing the wage rates for month 1; he feels the decision was the right one, considering all the implications of the increase. Morale was poor and he felt he had to do something about it.

3. The maintenance manager feels that saving $8000 on fixed overhead has helped the profitability of the business. He argues that the machines’ annual maintenance can wait for another month without a problem as the machines have been running well.
The variances for month 1 are as follows:

..............................................................................$
Material price   .............................................48 000 (Fav.)
Material usage  ............................................52 000 (Adv.)
Labour rate  .................................................15 000 (Adv.)
Labour efficiency .........................................18 000 (Fav.)
Labour idle time ..........................................12 000 (Fav.)
Variable overhead expenditure ...................18 000 (Adv.)
Variable overhead efficiency .......................30 000 (Fav.)
Fixed overhead expenditure .........................8 000 (Fav.)
Sales price ..................................................85 000 (Adv.)
Sales volume ..............................................21 000 (Adv.)

Fav. = Favourable, Adv. = Adverse
Chaff Co. uses labour hours to absorb the variable overhead.


Required:
(a) Comment on the performance of the purchasing manager, the production director and the maintenance manager using the variances and other information above and reach a conclusion as to whether or not they have each performed well.
In month 2 the following data apply:
Standard costs for 1 tonne of brown rice
- One to four tonnes of rice seeds are needed at a cost of $60 per tonne
- It takes two labour hours of work to produce one tonne of brown rice and labour is normally paid $18 per hour. Idle time is expected to be 10 percent of hours paid; this is not reflected in the rate of $18 above
- Two hours of variable overhead at a cost of $30 per hour
- The standard selling price is $240 per tonne
- The standard contribution per tonne is $56 per tonne
Budget information for month 2 is
- Fixed costs were budgeted at $210 000 for the month
- Budgeted production and sales were 8400 tonnes

The actual results for month 2 were as follows:
Actual production and sales were 8000 tonnes
- 12 000 tonnes of rice seeds were bought and used, costing $660 000
- 15 800 labour hours were paid for, costing $303  360
- 15 000 labour hours were worked
- Variable production overhead cost $480 000
- Fixed costs were $200 000
- Sales revenue achieved was $1 800 000

(b) Calculate the variances for month 2 in as much detail as the information allows and reconcile the budget profit to the actual profit using marginal costing principles.
You are not required to comment on the performance of the business or its managers for their performance in month 2.