You were asked to: Prepare a report showing the manufacturing cost of each Refrigerator and each Stove. Prepare a cost of production report using the ABC approach.
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.
Management was very concerned that their traditional method of costing may no longer be appropriate and wanted to consider using the ABC costing method. It has been suggested that three Cost pools be established, with the following cost Drivers, and the Overhead cost be shared among them as follows:
|
Cost Pool |
Amount |
Cost Driver |
|
|
|
|
|
Assembling |
$ 50,000 |
Labour cost |
|
Manufacturing |
$ 54,000 |
Labour Hours |
|
Inspecting |
$ 16,000 |
Number of Inspections |
|
|
|
|
In the month of January, the following production data was recorded:
|
|
Refrigerators |
Stoves |
|
|
|
|
|
Units produced |
15,000 |
25,000 |
|
Direct Materials Used |
$ 75,000 |
$ 125,000 |
|
Direct Labour Cost |
$ 40,000 |
$ 72,000 |
|
Direct Labour Hours |
12,000 |
15,000 |
|
Number of Inspections |
300 |
500 |
|
Work in Progress at the start of the month |
$ 12,500 |
$ 14,000 |
|
Work in Progress at the end of the month. |
$ 7,500 |
$ 12,000 |
|
|
|
|
Manufacturing Overheads for the month amounted to $ 120,000 and this was allocated equally between the two products, using the traditional approach.
You were asked to:
- Prepare a report showing the
manufacturing cost of each Refrigerator and each Stove. - Prepare a cost of production report using the ABC approach.
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