Reference no: EM132994070

Question - Whateva Ltd uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. The costing system for manufacturing has two direct cost categories (direct materials and direct manufacturing labour, both variable). At the 24 000 budgeted direct manufacturing labour-hour level for August, budgeted direct manufacturing labour is $480,000, budgeted variable manufacturing overhead is $288,000 and budgeted fixed manufacturing overhead is $340,000.

The following are actual results for August:

Direct materials purchase 160 000kg

Direct materials usage 96 000kg

Direct manufacturing labour 25 500hrs

The standard cost per kilogram of direct materials is $11 .50. The standard allowance is 3 kilograms of direct materials for each unit of product. During August 30 000 units of product were produced. There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per kilogram.

In July, labour unrest took place as a result of cheaper, inferior direct materials purchased by the company. The inferior products were considered dangerous by the workers resulting in a major slowdown in the pace of production. This caused an unfavourable direct manufacturing labour efficiency variance of $45,000. There was no direct manufacturing labour price variance. Labour unrest persisted into August. Some workers resigned due to the dangerous work environment. Their replacements were hired at higher wage rates, which had to be extended to all workers. The actual average wage rate in August exceeded the standard average wage rate by $0.50 per hour.

Larry Laidback, the junior cost accountant reported the direct material and direct manufacturing labour variances to the production manager Andy Anxious. Andy is concerned that the variances reported to him may reflect badly on him due to the large volume of poor-quality material purchased. He is also concerned that the report will affect staff bonuses (including his and Larry's) and asks Larry to calculate the labour variances by changing the actual hours to the 'budgeted' or 'standard' hours.

Required -

a) In the case study above, and apply flexible budget variance techniques to calculate the variances of Whateva Ltd for direct materials and direct manufacturing labour in August using the actual 25 500 labour hours.

b) Interpret the variances, and report to Andy how the purchase of the poor-quality direct materials in the production process impacted the direct material and direct manufacturing labour variances. In reporting to management (Andy), explain what you think will happen in September.

c) If Larry agrees to Andy's request, critique his behaviour against the CIMA Code of Ethics for Professional Accountants? Advise Larry what he should do.