Rabuor Ltd. manufactures a range of products.

The company absorbs production overheads using a rate of

200% of the direct wages. This rate was calculated from the following budgeted figures:
Sh.“000”
 variable production cost o 6,400
 fixed production costs o 9,600
 Direct labor cost o 8,000

The management is faced with the following decision making problems:

problem 1
The normal selling price per unit of product EXEM is Sh.220 while the unit production cost is as
Follows :
Sh.
Raw materials 80
Direct labour
40
production overheads 80
200

There is a possibility of supplying a special order for 2,000 units of product EXEM at Sh. 160 each If the
order is accepted, the normal budgeted sales would not be affected and the company n e necessary capacity
to produce the additional units.
Problem 2
The cost of making component BEE, which forms part of product WYE is given below:

Sh.
Raw materials 40
Direct labour 80
Production overheads 160
280

Component BEE could be bought from an outside supplier for Sh.200. Fixed production costs will not be
affected.

Required:
i) Advise the management on whether to accept the special order under Problem 1.
ii) Evaluate whether the company should continue to make component BEE or buy it from an outside
supplier under Problem 2.
Raw materials
Question 15
manufactures four products; AA, BB, CC and DD. The budgeted income statement for the month of
June 2012 is as follows:

AA Sh. BB cc DD
Sh. Sh. Sh.
Sales 90,000 44,000 56,000 64,000
Costs:
Direct materials 20.000 16.000 22,000 20.000
Direct labour 24,000 15.000 16.020 27.900
Overheads: Variable
6,000 4.000 6,000 5.000
Fixed
Total costs 14,000 10,000 10,000 8.000
Profit/(Loss) 64,000 45,000 54,020 60,900
26,000 (1,000) 1,980 3.100

Additional information:
1. Direct labor is paid at the rate of Sh. 15 per hour and is limited to 5,000 hours for the month of
June 2012.
2. The average market demand for the products has been forecasted as follows

Required;
a) Calculate the shortfall in the hours available.
b) Rank the products in order of priority based on the contribution per hour.
c) Advise the management on the most profitable product mix.
d) The management of Daiton Ltd. is considering whether to discontinue the manufacture of
product BB which is' expected to realise a loss in June 2012.

Advise the management whether product BB should be discontinued from production, citing two
reasons for your advice.

x 6,000 = 1,500 hours

QUESTION 15
a) Shortfall in hours
(24,000+ 15,000+ 16,020 + 27.900) = Sh 82,920

82,920
= 5,528 Hours
15

Hours
5,528
Require
Available 5,000
Shortfall 528

b) Ranking in order of priority

AA BB CC DD
Sh. Sh. Sh. Sh.
Variable costs
Direct materials 20.000 16,000 22,000 20,000
Direct Labour 24.000 15.000 16,020 27,900
Overheads 6,000 4.000 6,000 5,000
Total 50.000 35.000 44.020 52,900
Sales 90,000 44,000 56,000 64,000
Contribution 40,000 9T00 11.980 11J00

24,000 15,000 16.020 27,900

15 15 15 15
AA BB CC DD
Number of hours 1,600 1,000 1,068 1,860
Contribution (Sh) 40.000 9,000 11,980 11,100
Contribution per hour (Sh.) 25 9 11.22 5.97
Ranking 1 3 2 4

c) Product mix
Hours available 5,000

Less: Units Hours

AA 8,000 1,600
CC 3,600 1,068
BB 2,000 1,000
DD 2,664 1,332 5,000

Therefore produce: 8,000 units of AA

2,000 units of BB
3,600 units of CC
2,664 units of DD
d) Daiton Ltd should not discontinue the production of product BB.
Reasons
• Product BB is currently making a large contribution that is Sh.9, 000 towards the Fixed costs
 allocated to it. If productionIs discontinued, it is unlikely that these fixed costs will disappear and
they will therefore need to be absorbed by other products.
• All the four products may be part of a homogeneous group and therefore reliant upon each other.
QUESTION 1
a)
i) Production budget January to March 2016
January February March
(units) (units) (units) April (units)
Budgeted sales 10,000 12,000 14,000 15,000
Add: Budgeted closing stock
(20% of sales of next month (W1 ) 2,400 2,800 3,000 3,000
12,400 14,800 17,000 18,000
Less:
Opening stock (2,700) (2,400) (2,800) (3,000)
Budgeted output 9,700 12A00 14,200 15,000

Budgeted closing stock

January 20% x 12,000 = Sh. 2,400
February 20% x 14,000 = Sh. 2.800
March 20% x 15.000 = Sh. 3,000
April 20% x 15,000 = Sh. 3,000

Total budgeted output for the quarter ended 31 March 2016 = 9,700 + 12,400 + 14,200 = 36,300
units

ii) Raw materials consumption budget (in quantity) for the four months from January 2016 to
April 2016:
Month Budgeted Material X of 4Kg Material Y at 6 Kg
Output (units) per unit per unit
January 9,700 38,800 58.200
February 12,400 49,600 74,400
March 14,200 56,800 85,200
April 15,000 60,000 90,000
Total 205,200 307,800

iii) Raw materials purchases budget in quantity for quarter ended 31 March 2016:

Material X in kgs Material Y in kgs

Raw materials required for production (Wl) 145,200 217,300
Add: Closing stock of raw materials (W2) 30,000 45,000
175.200 262,800
Less: Opening stock of raw materials (19,000) (29,000)
156,200 233,800
Workings

1. Raw materials required for production:

Material X Material Y
January 38,800 58,200
February 49,600 74,400
March 56,800 85,200
145,200 217,800

2. Closing stock budgeted to be equal to half of the requirements of next month's production:

Raw materials Material X Material Y

April 2016 Sh. 60.000 Sh. 90,000
Budgeted Closing Stock Ax 60,000 = 30,000 Ax 90,000 = 45.000

(i) Material price variance

Material X: (10 x 165,000) - (10.2 x 165,000)
= 1,650.000- 1,683,000
= Sh.33, 000 (A)

Material Y: (15 x 238,000)-(15.1 x238,000)

= 3,570,000-3,593,800
= Sh.23, 800 (A)

(i) Material usage variance

Material X: (10 x 4 x 40,000) - (10 x 165,000)
= 1,600,000- 1,650,000
= 50,000 (A)

Material Y: (15 x 6 x 40,000)-(15 x 238,000)

= 3,600,000-3,570,000
= 30.000(F)

(ii) Direct labour rate variance

Actual hours x (Std. rate - Actual rate)
= 32,000 x (40 -41)
= 32,000 (A)

(iii) Direct labour efficiency variance

= Sh.40x (30,000 - 32,000)
= Sh.80, 000 (A)
Workings:
1. Standard labour rate per hour
Budgeted Output Units
January 9,700
February 12,400
March 14,200
36,300

budgeted direct labour hours = budgeted output x budgeted direct labour hour per unit budgeted
direct labour hours = 36,300 x 45 min = 1,633,500 minutes

1,633,500 minutes
27,225 hours

60 minutes
2. Standard labour hours for actual output
Budgeted direct labour cost 1,089,000
standard labour rate per hour = = Sh. 40
40,000 x 3/4 hour = 30,000 hours Budgeted direct labour hours 27,225 hours

3. Actual labour hour rate

1,312,000 ..
---------- Sh. 41
32,000
November 2016 Question Five
QUESTION 2
c)
i) Production overhead absorption rates

Profit statement of the special order:

Sh. Sh.
Sales (2.000 x 160) 320,000
Production cost:
Raw materials (2,000 x 80) 160.000 80,000
Direct labour (2,000 x 40) 64,000
Variable production cost (80% x 80,000) (304,000)
Contribution 16,000

Note: Fixed costs are irrelevant since they will not be affected by the decision.
The company should accept the special order since it will result into additional contribution of
Sh. 16.000
ii) Evaluation of make or buy decision
1. Cost of making component BEE:
Sh.
Raw material cost 40
Direct labour 80
Variable production cost (80% x 80) 64
Variable production cost 184

2. Cost of outsourcing component BEE - Sh. 200

Note: Fixed costs are irrelevant as they would still be incurred whether the component is made
or outsourced.
Decision: The company should continue to make component BEE since it is cheaper.