ACCT2003: Variance Analysis and Production Cost Control Assessment

Assessment 3

Questions

1. Peter is the manager of the piston division of Car Parts Co. The division, which manufactures pistons for hydraulic drives, uses a standard cost system and calculates the standard cost of a completed piston as $85, as follows:

The fixed overhead rate is based on an esƟmated 1000 units per month. Direct labour is nearly a fixed cost in this division. Selling and administrative costs are $50 000 per month plus $10 per piston sold. 

The following information is for production during April:

The enƟty’s policy is to record materials price variances at the Ɵme materials are purchased. You may want to use a spreadsheet to perform calculaƟons. Recently the entity hired a cost accountant from the local university. After a few months at the entity, the new accountant proposed a performance measurement report consisting of two parts. The first part will report the actual number of units started during each month, the target number of units that should have been started, and a variance. The first part of the report concentrates on units started because many units are scrapped in the manufacturing process (to maintain high quality).

Therefore, the best measure of effort expended is the number of units on which work was begun. The target number of units to be begun in a month is the number of units started in the corresponding month last year plus 5 per cent. The second part will calculate an actual cost per good unit completed during each month, the target cost per unit, and a variance. Actual costs per unit will be calculated by dividing total production cost incurred during the month by the number of good units completed during the month.

The target cost per unit is the average cost for manufacturing this kind of product as determined from industry newsletters. This report should be prepared and distributed quarterly. He suggested that a bonus be awarded whenever units started exceeds target and costs are below target.

Required

• Prepare a flexible cost budget for the month of April.
• Calculate all of the common direct cost variances. (Note: There are no variances for shaft housings.) 
• Calculate all common factory overhead variances.
• Calculate a total variance for the selling and administrative costs.
• Prepare a complete, yet concise, report that would be useful in evaluating control of production costs for April.
• Prepare a report that sums all the variances necessary to prepare the reconciling journal entry at the end of the period. Explain how you would close the total variance; that is, identify the account or accounts that would be affected, and whether expenses in the accounts will be increased or decreased to adjust the records for the total variance.
• Suppose you are manager of the piston division, and you are reviewing the report prepared in part (5). Use information in the report to identify questions you might have about April’s production costs.
• Discuss possible reasons why the entity did not previously use a variance system to monitor and motivate worker performance.
• Describe weaknesses in the proposed performance measurement syst
• Discuss whether you agree with the proposal and explain how you would communicate your response.

2. Baron Toddler Toys produces toy construction vehicles for young children. Plastic pieces are moulded in the plastics department. These pieces are transferred to the assembly department, where direct materials are added after some assembly has been done. For example, plastic pieces of road graders are put together, then the blades and wheel assemblies are added, and finally some details are painted on the sides and back. The direct materials are added in the assembly department when the process is 75 per cent complete. Beginning inventory is 80 per cent complete and ending inventory is 25 per cent complete. Following are data for August.

Required

• Identify process costing methods for the assembly department. Explain and describe the pros and cons of different methods. 
• Prepare a cost report using the weighted average method and FIFO. 
• Record necessary entries based on the report prepared in (2). 
• Explain why an entity might specify limits for normal spoilage, after which spoilage is considered abnormal. List three factors that managers might consider in deciding whether to expend resources to reduce spoilage.

3. Gold Coast Council owns and operates an animal shelter that performs three services: housing and finding homes for stray and unwanted animals, providing health care and neutering services for the animals, and pet training services. One facility is dedicated to housing animals waiting to be adopted. A second facility houses veterinarian services. A third facility houses the director, his staff, and several dog trainers. This facility also has several large meeting rooms that are frequently used for classes given by the animal trainers. The trainers work with all of the animals to ensure that they are relatively easy to manage. They also provide dog obedience classes for adopting families.

Estimated annual costs for the animal shelter and its services are as follows:

On average, 70 animals per day are housed at the facility, and assume 365 days per year. The number of animals housed during the year totalled 4500. In addition, the trainers offer about 150 classes during about 30 weeks throughout the year. On average, 10 families attend each class. Last year the veterinarian clinic experienced 7500 animal visits. One of the council members just graduated from an accounting program and would like to set up an ABC system for the shelter so that the director can better understand the cost for each of the shelter’s services.

He gathers the following information:

Required

• Identify cost pools and assign costs to them, considering the three cost objects of interest. 
• Determine a cost driver for each cost pool and explain your choice.
• Calculate the allocation rates for each cost pool and cost driver. Interpret the allocation rate for each cost pool (that is explain what it means).
• When the council uses ABC information to improve operations, will it guarantee that the council will achieve benefits? 
• What benefits of ABM are expected to achieve? What costs will the council incur to generate these benefits?

Summary of Assessment Requirements

This assessment consists of three major questions focused on cost accounting, variance analysis, process costing, and Activity-Based Costing (ABC). Each question includes multiple analytical, computational, and interpretive tasks. The key requirements are:

Question 1 Variance Analysis & Performance Reporting

Students must:

1. Prepare a flexible cost budget for April.
2. Calculate direct cost variances (materials, labour, overhead; excluding shaft housings).
3. Calculate factory overhead variances (variable and fixed).
4. Compute the total variance for selling & administrative expenses.
5. Prepare a concise production cost control report for April.
6. Summarize all variances into a reconciling journal entry and identify accounts that require adjustment.
7. Review the variance report and formulate managerial questions about cost performance.
8. Explain why the firm previously did not use a variance system.
9. Identify weaknesses in the proposed performance measurement system.
10. Evaluate the proposal and provide a reasoned managerial response.

Question 2 Process Costing (Plastics & Assembly Department)

Students must:

1. Identify and compare process costing methods (Weighted Average vs FIFO), discussing pros and cons.
2. Prepare a cost of production report using both methods.
3. Record all necessary journal entries based on the cost report.
4. Discuss normal vs abnormal spoilage and identify factors influencing spoilage reduction decisions.

Question 3 Activity-Based Costing (ABC) for an Animal Shelter

Students must:

1. Identify relevant cost pools for the three services: animal housing, veterinary care, and training.
2. Determine and justify cost drivers for each pool.
3. Calculate allocation rates and interpret what each rate indicates.
4. Discuss whether ABC guarantees operational benefits.
5. Identify expected benefits of ABM and associated implementation costs.

How the Academic Mentor Guided the Student (Step-by-Step Approach)

The academic mentor used a systematic teaching process, ensuring the student understood both computational requirements and conceptual implications. The guidance occurred in the following structured steps:

Step 1: Understanding the Scope of the Assessment

The mentor began by breaking down each question into smaller tasks. The student was guided to understand:

• What computations were required
• Where interpretive analysis was expected
• How each requirement connects to management accounting principles

This formed the overall roadmap for completing the assessment.

Step 2: Reviewing the Scenario and Extracting Data

The mentor helped the student:

• Identify relevant numerical data
• Distinguish between fixed and variable costs
• Recognize cost behavior assumptions (e.g., labour nearly fixed, overhead based on normal activity)

This ensured the student had a solid foundation for computations.

Step 3: Flexible Budget Preparation (Q1)

The mentor explained:

• How to adjust variable costs based on actual output
• How to keep fixed costs unchanged
• How to layout the flexible budget format

The student learned to use systematic calculations and organize them clearly.

Step 4: Direct Cost Variance Analysis (Q1)

The mentor taught the student to compute:

• Material price & quantity variances
• Labour rate & efficiency variances
• Overhead spending, efficiency, and volume variances

Clear formulas were reviewed, and the mentor ensured the student interpreted each variance, not just calculated it.

Step 5: Factory Overhead & Administrative Variances (Q1)

The mentor explained:

• Differences between variable and fixed overhead variances
• How selling & administrative costs generate total variances
• How to summarize these in a clean managerial report

This helped the student connect variance results to performance management.

Step 6: Preparing Managerial Reports & Journal Entry (Q1)

The mentor guided the student to:

• Structure a results report
• Summarize all variances into a single reconciling journal entry
• Identify affected accounts (e.g., COGS, variance accounts)

This step reinforced the practical application of variance accounting.

Step 7: Evaluating the Proposed Measurement System (Q1)

The mentor helped the student identify:

• Strengths and weaknesses in the proposed performance measures
• Potential behavioural consequences of rewarding higher units started
• Whether cost-per-good-unit is an effective performance metric

The student learned to combine numerical analysis with managerial critique.

Step 8: Process Costing Methods Analysis (Q2)

The mentor explained:

• The differences between Weighted Average and FIFO
• How completion percentages affect equivalent units
• How to prepare cost of production reports for both methods

The student was guided step-by-step through equivalent unit calculations.

Step 9: Journal Entries and Spoilage Discussion (Q2)

The mentor reviewed:

• How to record cost transfers between departments
• How to classify spoilage (normal vs abnormal)
• The operational and financial implications of spoilage control

This improved the student’s understanding of process costing systems.

Step 10: ABC System Design (Q3)

The mentor coached the student to:

• Identify activities and cost pools
• Select appropriate cost drivers based on cause-effect logic
• Compute and interpret allocation rates
• Evaluate ABM benefits and limitations

This strengthened the student’s ability to apply ABC in a service environment.

Outcome of the Mentoring Process

By following the structured mentoring approach:

• The student successfully completed all required calculations and narrative responses.
• Variance analysis, process costing, and ABC principles were correctly applied.
• Managerial implications were clearly explained, demonstrating conceptual understanding.
• The final solution was logically presented, accurate, and aligned with assessment standards.

Learning Objectives Achieved

Through this guided process, the student achieved the following learning objectives:

• Understanding and applying flexible budgeting
• Computing and interpreting direct cost and overhead variances
• Preparing process costing reports using both FIFO and Weighted Average
• Recording cost flows through journals in a process costing system
• Distinguishing normal vs abnormal spoilage
• Designing and evaluating an Activity-Based Costing system
• Assessing the managerial implications of cost information
• Communicating findings clearly in structured managerial reports

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