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Special Ice Water Ltd is a manufacturer of various products including one that is marketed as Pure- Aqua. The company has developed standard costs for one bottle of Pure-Aqua, as follows:

Special Ice Water Ltd is a manufacturer of various products including one that is marketed as Pure- Aqua. The company has developed standard costs for one bottle of Pure-Aqua, as follows:

Essentials of Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
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QUESTION TWO Special Ice Water Ltd is a manufacturer of various products including one that is marketed as Pure- Aqua. The company has developed standard costs for one bottle of Pure-Aqua, as follows: Standard Standard price or rate Standard cost quantity 7 litres £12.00 per litre £ 84.00 Direct materials Direct labour 5 hours 72.50 14.50 per hour 4.40 per hour Variable manufacturing overhead 5 hours 22.00 Total standard cost £ 178.50 During the month of May, the following activity was recorded by the company in relation to the production of Pure-Aqua: Materials purchased were 32,000 litres at a cost of £390,400. There were no beginning stocks of materials on hand to start the month. At the end of the month, 2,400 litres of materials remained unused in the warehouse. The company employs 70 skilled workers to work on the production of Pure-Aqua. During May, each of them worked an average of 300 hours at an average rate of £15 per hour. Variable manufacturing overhead is assigned to Pure-Aqua on the basis of direct labour- hours. Variable manufacturing overhead costs incurred during May totalled £93,450. During May, 4,250 bottles of Pure-Aqua were produced. Compute the following variances for May: Direct material price and quantity variances. Direct labour rate and efficiency variances. Variable overhead spending and efficiency variances. (b) Identify two possible reasons for each of the variances that you have computed above. (c) Explain what is meant by the term 'management by exception' and critically evaluate the usefulness of standard costs in facilitating this process. (a)
Transcribed Image Text:QUESTION TWO Special Ice Water Ltd is a manufacturer of various products including one that is marketed as Pure- Aqua. The company has developed standard costs for one bottle of Pure-Aqua, as follows: Standard Standard price or rate Standard cost quantity 7 litres £12.00 per litre £ 84.00 Direct materials Direct labour 5 hours 72.50 14.50 per hour 4.40 per hour Variable manufacturing overhead 5 hours 22.00 Total standard cost £ 178.50 During the month of May, the following activity was recorded by the company in relation to the production of Pure-Aqua: Materials purchased were 32,000 litres at a cost of £390,400. There were no beginning stocks of materials on hand to start the month. At the end of the month, 2,400 litres of materials remained unused in the warehouse. The company employs 70 skilled workers to work on the production of Pure-Aqua. During May, each of them worked an average of 300 hours at an average rate of £15 per hour. Variable manufacturing overhead is assigned to Pure-Aqua on the basis of direct labour- hours. Variable manufacturing overhead costs incurred during May totalled £93,450. During May, 4,250 bottles of Pure-Aqua were produced. Compute the following variances for May: Direct material price and quantity variances. Direct labour rate and efficiency variances. Variable overhead spending and efficiency variances. (b) Identify two possible reasons for each of the variances that you have computed above. (c) Explain what is meant by the term 'management by exception' and critically evaluate the usefulness of standard costs in facilitating this process. (a)
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