Question 1 (25 marks)

Namibia Housing Enterprise (NHE) recently replaced the kitchens in all of its housing
inventory. Unfortunately, there has been a problem with the model of oven that they
used and the glass in some of the oven doors shatters when the oven is hot.

Due to the serious nature of the problem and the potential health and safety implications
NHE have decided that the glass in the oven doors should be replaced in all of its 1 200
houses within the next three months at a rate of 16 houses per day.

The manufacturer of the oven offered to replace the glass themselves but do not have
enough replacement parts and do not have the facility to carry out the replacement
within the time scale that NHE requires. NHE’s maintenance manager agreed with the
manufacturer that their (NHE) own maintenance team would carry out the replacements
and that the manufacturer would pay N$512.40 per house for the costs of replacement
based on the following standard cost card:

N$
Replacement glass 459.50 Per unit
Nuts and Bolts 7.90 N$39.50 for a pack of 10. Two are required per
job one on each side of the oven door to hold
the glass in place.
Labour 25.00 10 minutes at a rate of N$150 per hour
Variable overheads 20.00 N$20 per job completed
Total 512.40

The first month of replacement work has taken place. The replacement engineer has
worked six days a week for the four week period and 378 houses had their oven glass
replaced. The following actual costs were incurred:
 N$
Replacement glass 163 830 381 units were purchased; 3 were damaged
during transit from house to house and had to
be scrapped.

Nuts and bolts 3 200 N$40.00 was paid per pack of 10.

Labour 24 327 159 hours at N$153 per hour. It took on

average 10 minutes to replace the glass in each
oven. There was also an average of 15 minutes
spent traveling between each job.

Variable overheads 7 182 N$19 per job completed.

Fixed overheads 15 900 These costs are apportioned to each
department by central services at the end of
each month.
Total 214 439

Required:

a) Prepare a reconciliation between budgeted and actual costs for the four-week
period of glass replacement, include all relevant variances. (11 marks)
b) Interpret the variances calculated, in particular identify any areas that you feel
should be brought to the attention of NHE senior management team. (10 marks)
c) Calculate the total cost of the replacement and the resultant deficit if spending
continues in line with the actual costs incurred so far. (4 marks)
Solution

Question 1
NHE – Reconciliation of budgeted to actual cost for oven glass replacement:

N$ Mark
Budgeted Cost N$512.40per house x 378 houses 193 687.20 1

Glass: Price Variance (SP – AP) x AQ (459.50 – 430) x 381 (w1) 11 239.50 F 1
Usage Variance (SQ – AQ) x SP (378 – 381) x 459.50 1 378.50 A 1

Nuts: Price Variance (SP – AP) x AQ (3.95 – 4) x 800 (w2) 40 A 1

Usage Variance (SQ – AQ) x SP (756 – 800) x 3.95 (w3) 173.80 A 1

Labour: Rate Variance (SR – AR) x AH (150 – 153) x 159 477 A 1

Efficiency Variance (SH – AH) x SR (63 – 159) x 150 (w4) 14 400 A 1

Variable Overhead Standard – Actual Cost 7 560 – 7 182 (w5) 378 F 1

Fixed overhead Budgeted – Actual Cost 0 – 15 900 15 900 A 1

Actual Cost 214 439 1

(1 mark for the format of the reconciliation)

Workings:

w1 N$163 830 / 381 = N$430 actual cost per unit

w2 N$40 for 10 = N$4 each

w3 2 per job x 381 jobs completed = 756 standard quantity

N$3 200 / N$4 = 800 units actually used

w4 standard is 10 mins per job x 378 jobs completed = 3780 mins / 60 = 63 hours

w5 N$20 per job completed x 378 jobs = N$7 560.

b) Interpretation of variances and areas for management attention:

The cost of replacing the glass is more than was allowed for in the standard. NHE will
either need to contact the manufacturer and request additional compensation or find additional
budget to subsidise the replacement. 
They could chose not to replace the glass in all of its housing inventory but they could then be
liable to claims should someone be injured by the fault. 

The price of glass results in a large favourable variance suggesting that a price for bulk buying
has been negotiated. This goes a long way towards balancing the adverse variances. 
It would appear that the standard set was based upon an ideal standard and did not take
account of any wastage on materials. As a result of breakage of glass and additional usage of
nuts and bolts there are adverse usage variances. 

The standard set also did not take account of the fact that the replacement engineer needed to
travel between jobs. Labour efficiency shows a large adverse variance however the engineer
completed the jobs within the standard time, it was traveling time that created the variance. 

Fixed overheads were not included in the standard that was set. Overheads are recharged to
all areas of the organisation based on labour hours and as such should have been included in
the standard set. 

This has had a large impact not only because overheads had to be included but also because
of the increased labour hours when traveling is taken into consideration. 

Overall management should be aware that the standard that was set was not as accurate as it
should have been. The management accountant is there to support management with issues
such as this and would have been glad to help with the figures before this agreement were
finalised. 

c) Total cost should spending continue:

N$214 439 \ 378 homes completed x 1200 homes in total = N$680 758.70

Resultant Deficit:

N$680 758.70 – N$512.40 x 1200 = N$65 878.70