The following information relates to the month of Jan 2005 :

Inventory, 1 Jan 11,000 units

Production 35,000 units
Inventory, 31 Jan 14,000 units

Direct material $ 26.00 per unit

Direct labour 13.00 per unit
Variable manufacturing overhead 6.00 per unit
Fixed manufacturing overhead 122,500 per month

Variable marketing costs $ 3.00 per unit

Fixed marketing and administrative costs 33,000 per month

Normal capacity for the company is 35,000 units per month. The
product sells for $70.00 per unit.

Required :

(a) Prepare an Income Statement for the month ending 31 Jan

2005 using the variable costing format.

(b) Prepare an Income Statement for the month ending 31 Jan

2005 using the absorption costing format.

(c) Prepare a schedule reconciling the net profit for Jan 2005
under the variable and absorption costing methods.
The standard costs for 1 bag of fertilizer is as follows :

Direct materials (5 kg @ $3.00 / kg) $ 15.00

Direct labour (2 hr @ $10.50 / hr) 21.00
Variable overhead (2 DLH @ $2.50 / DLH) 5.00
Fixed overhead (2DLH @ $3.50 / DLH) 7.00
Total standard cost $ 48.00

Actual results for the 3 months were :

Actual output 125,000 bags

Direct materials (purchased and used 630,000 kg) $2,016,000

Direct labour (230,000 hrs @ $10.90 / hr) 2,507,000

Variable overhead 584,200
Fixed overhead 1,030,000

Fixed overhead rate was calculated based on the budgeted

capacity of 300,000 direct labour hours (DLH).

Required :

(a) Calculate the following variances :

(i) Direct material price, quantity and total variances
(ii) Direct labour rate, efficiency and total variances
(iii) Variable overhead spending, efficiency and total
variances
(iv) Fixed overhead spending, volume and total variances

(b) Comment on the variances.

The following information relates to the 2 products :

Rock Pebble
Selling price / unit $18.00 $14.00
Variable production $8.20 $5.50
costs / unit
Sales commission costs $0.80 $0.50
/ unit
Budgeted sales mix 2 3

Total annual fixed costs are as follows :

Fixed production costs $330,000
Fixed marketing costs 195,000
$525,000

Ignore income tax considerations.

Required :

(a) Assume that initially, the company only sells Rock. What is
the breakeven (all other information unchanged)? How
many units must the company sell to achieve a target profit
of $189,000?

(b) Calculate the number of units of Rock and Pebble required

to breakeven. Assume that the planned sales mix is attained.

(c) If the planned sales mix is attained, what is the operating

profit when a total of 120,000 units are sold?
The following are the budgeted sales and production units of
Energon, for the months of Dec 2004 to Mar 2005 :
Energon
Sales Production
(units) (units)
Dec 8,000 7,500
Jan 10,000 9,000
Feb 8,500 8,000
Mar 8,000 7,000

Each unit of Energon requires 3 components of Particle-E.

Particle-E costs $3.50 per component. Power pays its supplier
50% in the month of purchase and the remainder, one (1) month
following the purchase. Power normally keeps the ending raw
material inventory at 40% of the following month’s direct
material usage requirement.

Power also incurs the following manufacturing overhead :

Utilities $1.20 per unit produced

Depreciation – Plant Equipment $118,800 per annum
Plant manager’s salary $7,500 per month

Manufacturing overheads are paid in the month incurred.

Required :

(a) Prepare the direct materials budget (including payments to

suppliers) for the months of Jan and Feb 2005.

(b) Prepare the manufacturing overhead budget (including

payments for these expenses) for the months of Jan and Feb
2005.