Question 1:

A company's budgeted production of Product Zebra for the month ending 30 November 2004 was 10,000 units. The fixed overheads were budgeted at Rs3,200,000.

The standard costs for the product are:

Direct materials - 6 litres of material A at Rs30 per litre
Direct labour - 4 hours at Rs50 per hour
Variable overhead is absorbed at Rs40 per labour hour
The manufacturer operates a standard marginal costing system and the standard selling price is set based on a mark-up of 25%.

The actual results for the month ended 30 November 2004 were:
Production: 9,800 units
Direct materials: 59,700 litres at a total cost of Rs1,761,150
Direct labour: 39,500 hours at a total cost of Rs1,920,800
Variable overheads incurred: Rs1,542,000
Fixed overheads incurred: Rs3,120,000

During the month of November 2004, the company managed to sell all the quantity produced by offering a 3 % discount on the standard price.

Required:

(a) State briefly any four problems which a firm may face when setting standards.

(b) Calculate the standard cost and standard selling of product Zebra

(c) Prepare a marginal cost operating statement for the month of May, reconciling the budgeted contribution to the actual profit using as many variances as the data permit.