Activity 9

Nkosi Equipment uses a flexible budget for its indirect manufacturing costs. For

2013, the company anticipated that it would produce 18 000 units with 3 500

machine-hours and 7 200 employee days. The costs and cost drivers were to be

as follows:

FIXED VARIABLE COST DRIVER

Product handling R30 000 R0.40 per unit

Inspection R8 000 R8.00 per 100 unit batch

Utilities R400 R4.00 per 100 unit batch

Maintenance R1 000 R0.20 per machine-hour

Supplies - R5.00 per employee day

During the year, the company processed 20 000 units, worked 7 500 employee

days, and had 4 000 machine-hours. The actual costs for 2013 were:

Product handling R36 000

Inspection R9 000

Utilities R1 600

Maintenance R1 200

Supplies R37 500

Required

1. Prepare the static budget using the overhead items above and then compute

the static-budget variances. (5)

2. Prepare the flexible budget using the overhead items above and then

compute the flexible-budget variances. (5)

Activity 10

Shongwe Limited produces and sell product A. Product A consists of 2

materials: F and G. The following standard information is available:

Units produced and sold 5 000

Total cost: material F R75 000

Cost per kilogram: material F R5

Total cost: material G R100 000

Material G: liters to be used 50 000 L

Labour hours needed per product A 2

Labour rate per hour R15

Selling price per unit R125

Total fixed cost R85 000

During the period, the following occurred:

Units produced and sold 6 000

Material F cost of purchases (15 000 kg) R78 000

Material G: liters used 61 200

Cost per liter: material G R1.95

Direct labour cost (15 000 hours) R240 000

Selling price per unit R123

Total fixed cost R80 000

Required

1 Calculate the price and efficiency variances for materials and labour using an

arrow diagram. Show all calculations clearly. (18)

2 Give one possible reason for the material variances calculated in 2.1 (4)