Kula Company Ltd manufactures two products, Flora and Fauna. Estimates for the company’s products for next year are provided below: Flora Fauna Estimated production volume 3 000 4 000 Direct material cost $60 / unit $90 / unit Direct labour per unit 3 hours @ $25 / hour 4 hours @ $25 / hour Kula’s estimated overhead of $1 500 000 can be identified with three major activities: order processing ($280 000), machine processing ($1 020 000) and product inspection ($200 000). These activities are driven by the number of orders processed, machine hours, and inspection hours, respectively. Estimated activity levels for the next year are as follows: Flora Fauna Total Orders processed 500 300 800 Machine hours 39 000 46 000 85 000 Inspection hours 7 000 18 000 25 000
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.
- Kula Company Ltd manufactures two products, Flora and Fauna. Estimates for the company’s products for next year are provided below:
|
|
Flora |
Fauna |
|
Estimated production volume |
3 000 |
4 000 |
|
Direct material cost |
$60 / unit |
$90 / unit |
|
Direct labour per unit |
3 hours @ $25 / hour |
4 hours @ $25 / hour |
Kula’s estimated
Estimated activity levels for the next year are as follows:
|
|
Flora |
Fauna |
Total |
|
Orders processed |
500 |
300 |
800 |
|
Machine hours |
39 000 |
46 000 |
85 000 |
|
Inspection hours |
7 000 |
18 000 |
25 000 |
Required:
Assuming that Kula Company Ltd uses activity-based costing to apply overhead to production, calculate the unit
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