(a) Carshine Ltd provides a service to motor car owners. Using a special item of equipment and a special fluid, it treats the external paintwork of cars, which has the effect of making the paintwork seem as new. The current standard costs of treating one car are as follows:
|
Direct labour (30 minutes) |
£ |
|
Direct materials (2 litres) |
2.30 |
|
Fixed overheads (based on the budgeted |
1.50 |
|
monthly output of 20,000 cars treated) |
3.30 |
|
7.10 |
|
|
Selling price |
10.50 |
|
Profit |
£3.40 |
During last month, due to an unexpected fall in demand for the service, only 15,000 cars were treated.
The actual results for last month were as follows:
|
£ |
£ |
|
|
Sales revenue |
153,900 |
|
|
Less: Direct labour (8,000 hours) |
35,040 |
|
|
Direct materials (32,000 litres) |
23,360 |
|
|
Fixed overheads |
67,350 |
|
|
125,750 |
||
|
Profit |
£28,150 |
Required
Prepare a statement that reconciles the budgeted actual operating profit for the business for last month, going into as much detailed analysis as the above information allows.
(b) You subsequently discovered that normally (that is when the demand is as budgeted), 20% of the direct labour is worked as overtime which is paid at a 25% premium (that is, the normal rate plus 25%). The standard direct labour cost takes this into account.
During last month no overtime was worked. However, the business followed its usual practice of employing its full direct labour force for the basic working hours throughout the month. Of the hours worked 7,300 were devoted to treating cars. The other 700 hours were spent tidying up the premises and doing some non routine maintenance work.
Required
Show how the statement, which you prepared in (a), can be revised so that it more clearly identifies how much of the profit shortfall is the responsibility of various managers. You should clearly explain your revisions to the statement and you should make suggestions as to possible reasons for individual variances.