A company has prepared the following summary from its budget: $’000 Sales (100,000 unit) 1,500 Opening inventory 0 Production costs (115,000 units): Direct materials 460 Direct labour 575 Variable overhead 115 Fixed overhead 230 Closing inventory (1500 units) (15) Other overheads 200 Profit 65 The company has now decided to change the budget as follows: • Reduce the selling price by $2 per unit because of competition, this will not affect the number of units sold. • Increase the unit production costs for direct labour by 10% and variable overhead by 5%. • Reduce production to 100,000 units. REQUIRED By how much units will net profit decrease as a result of these changes? Give your answer to the nearest $’000. (Show your calculations)
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
A company has prepared the following summary from its budget:
$’000
Sales (100,000 unit) 1,500
Opening inventory 0
Production costs (115,000 units):
Direct materials 460
Direct labour 575
Variable overhead 115
Fixed overhead 230
Closing inventory (1500 units) (15)
Other
Profit 65
The company has now decided to change the budget as follows:
• Reduce the selling price by $2 per unit because of competition, this will not affect the
number of units sold.
• Increase the unit production costs for direct labour by 10% and variable overhead by
5%.
• Reduce production to 100,000 units.
REQUIRED
By how much units will net profit decrease as a result of these changes? Give your answer
to the nearest $’000. (Show your calculations)
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