Ash plc produces components which it sells to the aircraft industry. Mr. Ash, the managing
director, is always looking for ways to control the costs and improve performance .
Ash plc recorded the following actual results for Product RS8 for the last month:
Product RS8 2,100 units produced and sold for £14.50 per unit
Direct material M3 1,050 kg costing £1,680
Direct material M7 1,470 kg costing £2,793
Direct labour 525 hours costing £3,675
Variable production overhead £1,260
Fixed production overhead £4,725
Standard selling price and cost data for one unit of Product RS8 is as follows.
Selling price £15.00
Direct material M3 0.6 kg at £1.55 per kg
Direct material M7 0.68 kg at £1.75 per kg
Direct labour 14 minutes at £7.20 per direct labour hour
Variable production overhead £2.10 per direct labour hour
Fixed production overhead £9.00 per direct labour hour
At the start of the last month, 2,130 units of Product RS8 were budgeted to be produced . No stocks of raw materials are held. All production of Product RS8 is sold immediately to a single customer under a just-in-time agreement.
Required:
(a) Prepare an operating statement that reconciles budgeted profit with actual profit for Product RS8 for the last month. You should calculate variances in as much detail as allowed by the information provided. ( 40%)
(b) Discuss how the operating statement you have produced can assist managers in:
(i) controlling variable costs;
(ii) controlling fixed production overhead costs. (25%)
(c) Mr Ash has recently heard about Activity Based Costing (ABC) but is unsure what it is and whether Ash plc could adopt this. You, as the new management accountant, have been asked to provide Mr Ash with information on ABC, so that he can make a decision whether to introduce it into the company. Your answer should include an explanation of ABC, what the method is intended to do, a comparison with the traditional method and whether it would affect your calculations in part (a). (You do not need to recalculate part (a)).(35%)