Mukwa Products Limited (MPL) was founded ten years ago. The company designs and produces a variety of doors from Mukwa wood. Due to the increase in demand in the construction industry, the company enjoyed strong growth and made significant profits. However, this changed five years ago as a result of poor economic performance, reflected in increase in inflation rate, depreciation of the domestic currency against the major currencies and general increase in the cost of living. MPL directors are keen to ensure that costs are tightly controlled to avoid closing down. The company operates a standard marginal costing system.

The following details relate to the previous financial period.

Standard cost for one door;

Direct materials:

Woods             1.75 square metres      @         K111 per square metre

Other materials 16 units                       @         K1.25 per unit

Direct labour 0.75 hours                      @         K100 per hour

Variable production overhead           @         K23 per hour

Fixed production overhead                @         K26.0 per hour

The budgeted selling price is normally calculated by adding a profit margin of 20% to 

the total cost per door.

MPL budgeted to produce 10,000 doors during the period. Actual results from production and sales of 9,500 doors, selling at K410.50 per door were as follows:

Direct materials:                                                                                  K

Woods             17,100 square metres                          total cost         1,876,725

Other materials 159,600 units                                      total cost         177,480

Direct labour 6,650 hours                                             total cost         698,250

Variable production overhead                                   total cost         149,625

Fixed production overhead                                        total cost         249,375

Required:

(a) Identify and briefly explain three types of standards a management accountant may consider when introducing a standard costing system. 

(b)  Calculate the standard contribution per door. 

(c)   Calculate the following variances:

(i)   Total material variance

(ii)  Total labour variance

(iii) Total variable overhead variance

(iv) Fixed overhead expenditure variance

(v) Sales margin price and volume variances            

Answer rating: 100% (QA)

a Types of Standards in Standard Costing System 1 Ideal Standards Ideal standards represent the perfect or best achievable performance levels under the most favorable conditions These standards do not ... View the full answer