Q9, May 2012, Responsibility Center

A Production department of a large manufacturing company has furnished the following data for March 2012.

Particulars Direct materials Direct Labour Consumable Stores (Fixed) Repairs & Maintenance (Fixed) Supervision (Fixed) Factory Rent (Fixed) Depreciation (Fixed) Tools (Variable) Power & Fuel (Variable) Administration (Fixed)

Budgeted Actual (Rs. lacs) (Rs. lacs) 5.00 5.10 2.50 3.25 0.75 0.95 2.00 2.20 1.00 1.10 0.50 0.50 1.00 1.00 0.25 0.30 1.50 1.80 2.50 2.65

The department has 50 identified machines. During March 2012, the budgeted and actual production of the department was 10,000 and 12,500 units respectively. However, if the department is closed and the machine production is closed and the machine production services were hired from outside, the cost of hiring the services of similar machine would be Rs. 150 per unit. You are required to present a report showing the evaluation of the performance of the department based on the concept of responsibility centre.

Q9, May 2012, Responsibility Center Required:

You are required to present a report showing the evaluation of the performance of the department based on the concept of responsibility centre. (F: favourable; U: Unfavourable)
Budgeted Cost Flex

Particulars
A 1 2 3 4

Unit Cost Actual Variance F/U Budget Rs./Unit (Rs. lacs) (Rs. lacs) 50 25 2.5 15 5.10 3.25 0.30 1.80 10.45 0.95 2.20 1.10
4.25 14.70 -1.15 0.13 -0.01 -0.08 -1.11 F U F F F 6.25 3.13 0.31 1.88

DIRECT COSTS Direct materials (variable) Direct Labour (variable) Tools (Variable) Power & Fuel (Variable) Total Variable costs 5 Consumable Stores (Fixed) 6 Repairs & Maintenance (Fixed) 7 Supervision (Fixed)
Total Fixed Costs

11.56

Total Direct Costs Nos of units

Per unit cost B INDIRECT / ALLOCATED COSTS

11.56

12500
34

Factory Rent (Fixed) Depreciation (Fixed) Administration (Fixed)

Total Indirect / Allocated Costs

0.50 1.00 2.65

4.15 18.85 150.80

Full cost
Unit Full Cost

Comments: 1 In the variable costs, the variance wrt budgets are as follows: (i) the consumption of raw materials is favourable (ii) cost of direct labour is unfavourable (iii) the consumption of tools is favourable (iv) the consumption of tools is favourable 2 All fixed costs are unfavourable except factory rent and depreciation which are neutral. 3 The company should not hire production from outside at Rs. 150 per unit. This is because even if company hires production services at Rs. 150 per unit, it will continue to incur certain fixed costs as follows: (i) Factory rent 0.50 (ii) Depreciation 1.00 (iii) Administration 2.65 total 4.15 unit cost equivalent 33.2 Thus the cost to the company will be (Rs. 150 + Rs. 33.2) =Rs. 183.2 per unit

as against current full unit cost of Rs. 150.80

n of the performance

Volume Variance

Original F/U

Total

Budget Variance F/U (Rs. lacs) 5.00 2.50 0.25 1.50 9.25 0.75 2.00 1.00
3.75 13.00 0.10 0.75 0.05 0.30 1.20 0.20 0.20 0.10 0.50 1.70 U U U U U U U U U

1.25 0.63 0.06 0.38 2.31

U U U U U

10000
37.5

0.50 1.00 2.50

4.00 17.00 170.00

0.00 0.00 0.15 U 0.15 U 1.85 U 1.85 check -19.20 F

ion which are neutral.