# Finance and Accounting for Managers Fresh Juice Ltd manufactures f...

## Question

Finance and Accounting for Managers
Fresh Juice Ltd manufactures fruit juice. One of its products, High Juice has the following standard costs per container:
£
Direct materials (2 litres @ £1.50/lt)                      3.00
Direct labour ( ½ hour @ £25/hr)                         12.50
19.50
Selling price                                                             24.50
Standard profit margin                                             5.00
The monthly production and sales are planned to be 4,000 containers. The actual results for August were as follows:
£
Sales revenue                                                        91,650
Less       Direct materials                                  (11,408) (8,775 litres)
Direct labour                                     (46,250) (1,850 hours)
Operating profit                                  17,492
There was no opening or closing stocks. The company manufactured and sold 3,900 containers.
Required:
a) Calculate the flexed and actual budget.
b) Calculate the following variances:
Sales variances; volume and price
Direct material variances; usage and price
Direct labour variances; efficiency and rate
c) Present the above information as a part of a Business Report, providing possible explanations for the variances that you have calculated and suggestions as to how the company might try to improve its cost control.

## Solution Preview

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1. Introduction
Fresh Juice Ltd (“Fresh Juice”, the “Company”) manufactures juice. The company’ management projected that the demand for one of its products known as High Juice for the month of August would be 4,000 units. However, actual results show that the company only sold 3,900 units of this product, and that the operating profit it derived from the product fell short of the budgeted £5 per unit. Additionally, actual results show that the company incurred higher fixed overheads than originally budgeted for, and that the amount of direct materials used to produce the 3,900 units of the product exceeded the budgeted amount by about 12.5%.
The purpose of this report is to analyse budget variances, and to identify possible causes for these variances. The rest of the report is organised as follows: section 2 presents main findings including a summary of production and sales, and original, flexed and actual budgets, section 3 presents detailed variance analysis for sales, direct materials, direct labour, and fixed overhead, and section 4 presents a summary of the findings and recommendations to improve sales and production performance.
2. Main Findings
This section provides a comprehensive overview of Fresh Juice’s monthly production and sales for August. It includes a comparative view of the company’s actual performance, and its budgeted production and sales for the month.
2.1 Summary of production and sales for the month of August
Fresh Juice recorded an operating profit of £17,492 for the month of August against management’s projection of £20,000. This means that the company’s operating profit for the month was 12.54% lower than initially planned. The budgeted standard profit margin for the company was £5; therefore the drop in operating profit should have been £500 if the company had maintained its normal production costs per container. Consequently, the high drop in operating profits indicates that there were cost variations that resulted in the company spending more on production, and or selling its output at a lower price that management had budgeted.
Further analysis of Fresh Juice’s operating profits based on the actual production levels shows that the company still had a shortfall of 8.42% and this can only be due to having higher...

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