Monday 9 June 2008

ALL FOUR questions are compulsory and MUST be attempted
1 Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple process,
removes the outer husk of the rice to produce the brown rice. This means that there is substantial loss of weight in
the process. The market for the purchase of seeds and the sales of brown rice has been, and is expected to be, stable.
Chaff Co uses a variance analysis system to monitor its performance.
There has been some concern about the interpretation of the variances that have been calculated in month 1.
1. The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely
and saved the company thousands of dollars in purchase costs by buying the required quantity of cheaper seeds
from a new supplier.
2. The production director is upset at being criticised for increasing the wage rates for month 1; he feels the decision
was the right one, considering all the implications of the increase. Morale was poor and he felt he had to do
something about it.
3. The maintenance manager feels that saving $8,000 on fixed overhead has helped the profitability of the
business. He argues that the machines’ annual maintenance can wait for another month without a problem as
the machines have been running well.
The variances for month 1 are as follows:
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Variable overhead expenditure 18,000 (Adv)
Variable overhead efficiency 30,000 (Fav)
Fixed overhead expenditure 8,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)
Fav = Favourable, Adv = Adverse
Chaff Co uses labour hours to absorb the variable overhead.
(a) Comment on the performance of the purchasing manager, the production director and the maintenance
manager using the variances and other information above and reach a conclusion as to whether or not they
have each performed well
In month 2 the following data applies:
Standard costs for 1 tonne of brown rice
– 1·4 tonnes of rice seeds are needed at a cost of $60 per tonne
– It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is normally paid $18 per hour. Idle
time is expected to be 10% of hours paid; this is not reflected in the rate of $18 above.
– 2 hours of variable overhead at a cost of $30 per hour
– The standard selling price is $240 per tonne
– The standard contribution per tonne is $56 per tonne
Budget information for month 2 is
– Fixed costs were budgeted at $210,000 for the month
– Budgeted production and sales were 8,400 tonnes
The actual results for month 2 were as follows:
Actual production and sales were 8,000 tonnes
– 12,000 tonnes of rice seeds were bought and used, costing $660,000
– 15,800 labour hours were paid for, costing $303,360
– 15,000 labour hours were worked
– Variable production overhead cost $480,000
– Fixed costs were $200,000
– Sales revenue achieved was $1,800,000



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