Question 1 (27 marks) Forever-Chill (Pty) Ltd (hereafter referred to as FC) is a newly established...

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Question 1 (27 marks) Forever-Chill (Pty) Ltd (hereafter referred to as FC) is a newly established South African company that manufactures a specialised solar fan called "Breeze" and has a 30 June year end. The company started trading on 1 July 2019. The company sells its fans directly to the public. The company financial manager has suggested that FC operate a standard costing system and as a result the following standards were set for the year before commencement of production: Forever-Chill (Pty) Ltd: Standards for the year ending 30 June 2020 Budgeted annual production and sales quantity: 40 000 Breeze units Production standards per fan INPUT QUANTITY COST Raw materials: Steel 1.2 kilograms Technical components Labour: 1 component 1 hour R 75 per kilogram R 125 per component R 220 per hour Variable overheads are driven by machine hours. Each fan takes 2 machine hours to complete and incurs a variable overhead cost of R45 per machine hour. Fixed overheads are budgeted to be R45 000 per annum. The founders are currently analysing the results of their first year of running the business and actual results for the year are found below: Actual results for the year ending 30 June 2020 45 000 Breeze units were produced and sold during the year. As a result of country wide load shedding and the sunny South African weather, the Breeze fans were in high demand. Sales rose even further during November and December as some people bought them as Christmas gifts. Steel was bought at R80 per kilogram and FC managed to source a supplier for the technical components that offer a bulk discount if 50 000 components are bought. FC paid R 4 500 000 for an order of 50 000 components. Raw material quantities are summarised below: Steel Quantities purchased: 50 000 kg Quantities used: 49 500 kg Technical components 50 000 units 45 000 units The production process is highly labour-intensive and proved to be slightly more complex than originally thought. Labourers were required to spend more time on each fan, resulting in 1.2 hours spent per unit. Due to the additional time spent by the labourers on each fan however, the actual total machine time was reduced to 65 000 hours for the year. The actual labour expense for the year ending June 2020 was R9 180 000. FC kept a record of manufacturing overheads for each month, incurring the overheads as follows: Month Machine Hours Total Cost July 2019 3 250 R287 500 August 2019 3 900 R320 000 September 2019 4 570 R353 500 October 2019 5 950 R422 500 November 2019 7 780 R514 000 December 2019 8 500 R550 000 January 2020 7 850 R517 500 February 2020 5 950 R422 500 March 2020 5 700 R410 000 April 2020 4 850 R367 500 May 2020 3 550 R302 500 June 2020 3 150 R282 500 Question 1 - Please round all your answers to 2 decimal points Required: Marks a) Explain to the founders of the company the benefits of using a standard costing system. 4 b) Assuming that FC operates a standard, absorption costing system, calculate the following variances, showing all calculations: Raw material price variance Raw material usage variance Labour rate variance Labour efficiency variance Variable overhead expenditure variance 18 Variable overhead efficiency variance c) Interpret the variances calculated above. Ensure that your interpretation is supported by your calculations, as well as relevant information in the scenario 5 Total for Question 1 27 Question 1 (27 marks) Forever-Chill (Pty) Ltd (hereafter referred to as FC) is a newly established South African company that manufactures a specialised solar fan called "Breeze" and has a 30 June year end. The company started trading on 1 July 2019. The company sells its fans directly to the public. The company financial manager has suggested that FC operate a standard costing system and as a result the following standards were set for the year before commencement of production: Forever-Chill (Pty) Ltd: Standards for the year ending 30 June 2020 Budgeted annual production and sales quantity: 40 000 Breeze units Production standards per fan INPUT QUANTITY COST Raw materials: Steel 1.2 kilograms Technical components Labour: 1 component 1 hour R 75 per kilogram R 125 per component R 220 per hour Variable overheads are driven by machine hours. Each fan takes 2 machine hours to complete and incurs a variable overhead cost of R45 per machine hour. Fixed overheads are budgeted to be R45 000 per annum. The founders are currently analysing the results of their first year of running the business and actual results for the year are found below: Actual results for the year ending 30 June 2020 45 000 Breeze units were produced and sold during the year. As a result of country wide load shedding and the sunny South African weather, the Breeze fans were in high demand. Sales rose even further during November and December as some people bought them as Christmas gifts. Steel was bought at R80 per kilogram and FC managed to source a supplier for the technical components that offer a bulk discount if 50 000 components are bought. FC paid R 4 500 000 for an order of 50 000 components. Raw material quantities are summarised below: Steel Quantities purchased: 50 000 kg Quantities used: 49 500 kg Technical components 50 000 units 45 000 units The production process is highly labour-intensive and proved to be slightly more complex than originally thought. Labourers were required to spend more time on each fan, resulting in 1.2 hours spent per unit. Due to the additional time spent by the labourers on each fan however, the actual total machine time was reduced to 65 000 hours for the year. The actual labour expense for the year ending June 2020 was R9 180 000. FC kept a record of manufacturing overheads for each month, incurring the overheads as follows: Month Machine Hours Total Cost July 2019 3 250 R287 500 August 2019 3 900 R320 000 September 2019 4 570 R353 500 October 2019 5 950 R422 500 November 2019 7 780 R514 000 December 2019 8 500 R550 000 January 2020 7 850 R517 500 February 2020 5 950 R422 500 March 2020 5 700 R410 000 April 2020 4 850 R367 500 May 2020 3 550 R302 500 June 2020 3 150 R282 500 Question 1 - Please round all your answers to 2 decimal points Required: Marks a) Explain to the founders of the company the benefits of using a standard costing system. 4 b) Assuming that FC operates a standard, absorption costing system, calculate the following variances, showing all calculations: Raw material price variance Raw material usage variance Labour rate variance Labour efficiency variance Variable overhead expenditure variance 18 Variable overhead efficiency variance c) Interpret the variances calculated above. Ensure that your interpretation is supported by your calculations, as well as relevant information in the scenario 5 Total for Question 1 27