Required: Assuming that your calculations are prepared on 1 January 20X6, calculate four different cost-plus prices using four different cost bases which may help with the pricing decision for Dream Limited.
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.
Dream Limited is engaged in the production of olive oil.
Subtotals of the budgeted
|
|
Harvesting |
Pressing |
General factory overhead |
|
Variable overhead (R ) |
2 970 000 |
5 350 000 |
1 760 000 |
|
Fixed overhead (R ) |
500 000 |
1 600 000 |
1 900 000 |
|
Budgeted activity |
|
|
|
|
Machine hours |
140 000 |
112 000 |
|
|
Normal capacity |
|
|
|
|
Machine hours |
200 000 |
160 000 |
|
- General factory variable overheads are apportioned in line with machine hours worked in each department and general factory fixed overhead are apportioned on the basis of the normal machine hour capacity of the two departments.
- It has been a long-standing company practice to establish selling prices by applying a mark-up on cost of 45%. The direct material content is R20 per unit. Each unit of the product will take three labour hours (five machine hours) in the harvesting department and four labour hours (six machine hours) in the pressing department. Hourly labour rates are R25.00 and R26 respectively.
The following actual information relates to the 20X5 financial year:
January–June July–December
20X5 20X5
Fixed selling and administration costs
(dependent on the number of units sold) R456 000 R670 000
Distribution costs (Fixed and variable)
(dependent on number of units sold) R1 342 800 R1 057 100
Sales units 40 000 30 000
It is expected that the sales units during the first six months of the 20X6 year will be 40 000 units. Fixed selling and administration costs will not be incurred as from the 20X6 financial year. During the 20X6 financial year, the distribution costs is expected to be the same as last year’s.
Required:
Assuming that your calculations are prepared on 1 January 20X6, calculate four different cost-plus prices using four different cost bases which may help with the pricing decision for Dream Limited.
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