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TASK 2 Practical Exercise 1 - Abbot 1 Abbot ltd makes a special e ectronic component which has the following standard cost per unit: Per unit Notes Your additional ca/cula'ons Sales price 17 Direct Materials 35 35 per kg Direct Labour 12 24 per hour Demand was expected to be 3,000 units and fixed costs were expected to be 4,000 for the month of February. Several months later the results for February were reviewed and the following actual revenue and costs revealed. Tl Notes Sales Revenue 33,800 Direct Materials 14.040 3900 kg used Direct Labour 13.000 650 hours used Fixed costs 4,100 Profit 2,660 2,600 units were sold Required: You are to write a memo to your manager explaining the discrepancy between budgeted and actual profit for February. Your memo should include: a) Reconciliation of the budgeted prot to actual profit using variances (including sub variances). (table format) b) An explanation of what each variance means. c) At least two suggestions as to what may have caused each variance. d) An indication of which manager is responsible for each variance. e) Advice as to whether all variances should be investigated further (give reasoning) REMINDER: . Set up a table showing the original, flexed and actual [emits 2. Calculate the variances from the table. . Transfer the sales volume, sales price and xed overhead variances to the reconciliation. 4. Using either matrix or formula calculate the sub variances for the Total direct materials and Total direct labour variances. 5. Check the sub variances by adding together and getting the total variance (as in the table) 6. Transfer sub variances to the reconciliation 7. Starting with original budgeted prot add the favourable variances and subtract the adverse variances 8. Write the memo explaining the variances and whether they should be investigated -| w STEP 1: FLEX THE BUDGET Demand (units) Budget Flexed Actual (STEP 2) Variances Sales Revenue * Materials labour Fixed costs * PROFIT * *STEP3 The sales price, sales volume and fixed cost variances can be transferred directly to your reconcrl'iaon in STEP 6 STEP 4:- CALCUlATION 0F SUB VARJANCES MATRICES Tl Use the method that you feel most comfortable with i.e. formulae from your text book OR d matrices. The formulae have been included on page 7 of this worksheet. Labour Rate Variance:(a vs b) xd = Labour Efficiency Variance:(c vs d) x a_= TOTAL LABOUR VARIANCE ( add the above together - agree with original table?): STEP 5: Remember that when Sub variances added together should give you the same figure from your flexed table! DIRECT MATERIALS SUBVARIANCES STEP 6 : RECONCILIATION DIRECT MATERIALS FLEXED ACTUAL Reconcile the budgeted profit to the actual profit by adding the favourable variances to the budgeted profit and deducting the adverse variances. E PER KG/M / ETC Budgeted Profit b standard usage x actual no E OF KG/ M /ETC unit d Direct Materials Price Variance:(a vs b) x d = Direct Materials Usage Variance:(c vs d) x a = TOTAL MATERIALS VARIANCE (add the above together - agree with original table?): DIRECT LABOUR SUBVARIANCES DIRECT LABOUR FLEXED ACTUAL Actual Profit E PER HOUR b VOLUME OF HOURS standard usage x actual no. unit