Lock Co makes a single product – a lock – and uses marginal costing. The standard cost card for one unit is as follows:
A junior member of the accounts team produced the following variance statement for the month of May.
Lock Co used 3,648 kg of materials in the period and the labour force worked – and was paid for – 1,824 hours. Until now, Lock Co has had a market share of 25%. In the month of May, however, the market faced an unexpected 10% decline in the demand for locks.
Required:
(a) Prepare a statement which reconciles budgeted contribution to actual contribution in as much detail as possible. Do not calculate the sales price and the labour rate variances, since both of these have a value of nil. Clearly show all other workings. (12 marks)
(b) The production director at Lock Co believes that the way to persistently increase market share in the long term is to focus on quality, and is hoping to introduce a ‘Total Quality Management’ (TQM) approach. The finance director also shares this view and has said that ‘standard costing will no longer have a place within the organisation if TQM is introduced.’
Discuss the view that there is no longer a place for standard costing if TQM is introduced at Lock Co. (8 marks)