Problem: Smithton, Inc. makes and sells one product, the standard costs of which are as follows:
Direct materials (2 kg at 3.00/kg) = 6.00
Direct labour (30 minutes at 10.00/hr) = 5.00
Fixed overheads = 2.50
Total = 13.50
Selling price = 20.00
Standard profit margin = 6.50
The monthly production and sales are planned to be 1,300 units.
The actual results for May were as follows:
Sales revenue = 20,000
Less: Direct materials = (6,500) (2,100 kg)
Direct labour = (5,250) (510 hr)
Fixed overheads = (3,100)
Operating profit = 5,150
There were no inventories at the start or end of May.
Your supervisor has asked you to calculate the budgeted profit for May and then reconcile it to the actual profit through variances, going into as much detail as possible from the information available.
Once you have the figures computed, prepare a detailed report for your supervisor that includes a discussion of the following information:
- A listing of the variances that occurred within the month of May.
- An analysis of the standards developed and utilized by the organization.
- An analysis of each variance with regards to the possible explanations of why it occurred.
- An analysis of the business/strategic implications that exist for your organization in light of the new information.