a) Calculate the following variances for June:
Liverpool Manufacturing Limited developed the following standard costs for direct material and direct labour for one of their major products, the 45 litres heavy-duty plastic container. Each container requires the following:
|
Types of Cost |
Standard quantity |
Standard price |
|
Direct materials |
0.2 kilos |
£30 per kilo |
|
Direct labour |
0.1 hours |
£17 per hour |
During June, Liverpool Manufacturing Limited produced and sold 10,000 containers using 2,100 kilos of direct materials at an average cost per kilo of £25 and 1,100 direct labour hours at an average wage of £16 per hour.
Required:
- a) Calculate the following variances for June:
|
i. Direct material price variance |
|
ii. Direct material quantity variance |
|
iv. Direct labour rate variance |
|
v. Direct labour efficiency variance |
Part 2 Spanish Watch Company
The Spanish Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40.
|
Production’s cost per watch are: |
£ |
|
Direct materials |
6 |
|
Direct labour |
7 |
|
Variable overhead |
5 |
|
Division fixed cost |
2 |
|
Package & Delivery’s cost per watch are: |
£ |
|
Direct materials |
9 |
|
Direct labour |
3 |
|
Variable overhead |
4 |
|
Division fixed cost |
16 |
Notes: Fixed costs shown above are per watch for 100,000 units.
Required:
- a) Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income?
(2 marks)
- b) If the Package & Delivery Division purchases 100,000 watches from production departments and sells to retailers at a price of £150 per watch, what is the operating income of Spanish Watch Company?
(3 marks)
- c) If Production Division has excess capacity to produce 100,000 watches which it cannot sell externally, must it negotiate a transfer price below £40 per watch internally? If the production division cannot negotiate the appropriate transfer price with internal package and delivery division, what is the consequence of this? Explain.
(3 marks)
- d) Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Production Division sells 100,000 watches to retailers for £120 per watch.
- Scenario A: Negotiated transfer price of £30 per watch between divisions.
- Scenario B: Market-based transfer price of £40 per watch between divisions.
Explain fully.
(3 marks)
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