Question: 7

The Bashyam Co Ltd manufactures a variety of products of basically similar composition. Production is carried on by subjecting the various raw materials to a number of standardised operations, each major series of operations being carried out in a different department. All products are subject to the same initial processing which is carried out in departments A, B and C; the order and extent of further processing then depending upon the type of end product to be produced.

It has been decided that a standard costing system could be usefully employed within Bashyam and pilot schemed to be operated for six months based initially only on department B, the second department in the initial common same of operations. If the pilot scheme produces useful results then a management accountant will be employed and the system would be incorporated as appropriate throughout the whole firm.

The standard cost per unit of output of department B is:

Note 1. Based on normal monthly production of 400 units.

In the first month of operation of the pilot study (month 7 of the financial year), department B had no work in progress at the beginning and the end of the month. The actual costs allocated to department B in the first month of operation were:

Note 2. Actual cost of output of department A.

Note 3. Based on the actual expenditure on joint manufacturing overheads and allocated to departments in accordance with labour hours worked

The production manager feels that the actual costs of Rs.59,000 for production of 500 units indicates considerable inefficiency on the part of department B. he says, 'I was right to request that the pilot standard costing system be carried out in department B as I have suspected that they are inefficient and careless - this overspending of Rs.9,000 proves I am right'.

Required:

Prepare a brief statement which clearly indicates the reasons for the performance of department B and the extent to which that performance is attributable to department B. the statement should utilize variance analysis to the extent it is applicable and relevant.