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Q1. Boozy-Bob Ltd manufactures a single product - barrels of moonshine. The company operates a standard absorption costing system and absorb overheads based on direct labour hours. The standard selling price and standard costs for each barrel are as follows: Per barrel Selling price 300 Direct material (15 litres @ 9 per litre) 135 Direct labour (5 hours @ 12 per hour) 60 30 Variable production overheads (5 hours @ 6 per hour) Fixed production overheads (5 hours @ 3 per hour) Gross profit 15 60 The budgeted production and sales for the month were 1,000 barrels. The fixed overhead absorption rate has been calculated based on budgeted production for the month Actual results for the month were: Production 1,400 barrels Sales 1,200 barrels 306 Selling price Direct Materials Direct Labour 22,000 litres at 12 per litre 6,800 hours at 15 per hour 33,000 Variable production overheads Fixed production overheads 18,000 No inventories were held by Boozy-Bob. Required: a) Given the information above calculate the budgeted profit and the actual profit for the month. [6 marks] b) Prepare a statement reconciling the budgeted profit with the actual profit for the month. Your statement should show the variances in as much detail as possible. [11 marks] The Production Director was questioned about the variances. They explained that to improve the quality of the product better quality material was used and some of the semi-skilled labour was replaced with skilled labour. The production director believed that the improvement in the quality of the product would enable the company to increase the price of the product and result in increased sales. c) Discuss, using the variances calculated in part a), the effect on performance of the decisions taken by the Production Director. [8 marks] d) Explain why a standard costing system may not be considered appropriate in a modern manufacturing environment. Please include a discussion on the future role of 'standard costing' in your answer. [8 marks] [Total: 33 marks]

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