Windsurfers of Perth Limited makes and sells windsurfing boards in the UK. It buys the board already
Question:
Windsurfers of Perth Limited makes and sells windsurfing boards in the UK. It buys the board already made (complete with all fittings) but it manufactures the sails and assembles the finished product. It operates a standard variable costing system and performs variance analysis on a monthly basis.
Sailcloth
Labour
Board
Variable overheads
The standard variable cost for one windsurfer
60 square meters at £7.00 per square meter 20 hours at £8 per hour
£400
£50
Windsurfers Limited budgeted to sell 90 units in May at a price of £1,500 each. It esti- mates that its fixed overheads are £240,000 a year (incurred evenly throughout the year). Variable overheads are absorbed per windsurfer (not per direct labour hour). Opening and closing stocks were zero for May.
The actual performance for May was as follows:
Item
Sales
Revenue
Sailcloth
Labour
Board
Variable overheads Fixed overheads
Detail
81 windsurfers
£109,350 total
4,800 square metres, costing £38,400 1,540 hours, costing £13,860
£420 per windsurfer
£3,240 total
£21,000 total
Tasks:
a) Perform a variance analysis for May in as much detail as the information will allow. Produce a profit reconciliation statement and comment on your findings.
b) Windsurfers of Perth Limited holds the purchasing department responsible for the price at which materials are purchased and the manufacturing department responsible for the quantities of materials used. Comment on this policy.
c) Sometimes, managers blame adverse variances on the poor standard setting. Explain how accurate standards can be set and describe the dangers of setting inaccurate standards.