Standard costing and variance

analysis: 1

Question IM 18.1 (a) JB plc operates a standard marginal cost accounting system. Information
Intermediate: relating to product J, which is made in one of the company departments, is
Flexible budgets given below:
and computation Standard marginal
of labour and product cost
material variances Product J Unit (£)

Direct material
6 kilograms at £4 per kg 24
Direct labour
1 hour at £7 per hour 7
Variable production overheada 03
34
a Variable production overhead varies with units produced

Budgeted fixed production overhead, per month: £100 000.

Budgeted production for product J: 20 000 units per month.
Actual production and costs for month 6 were as follows:

Units of J produced 18 500 (£)

Direct materials purchased and used: 113 500kg 442 650

Direct labour: 17 800 hours 129 940
Variable production overhead incurred 58 800
Fixed production overhead incurred 104 000
735 390
You are required to:
(i) prepare a columnar statement showing, by element of cost, the:
(i) original budget;
(ii) flexed budget;
(iii) actual;
(iv) total variances; (9 marks)
(ii) subdivide the variances for direct material and direct labour shown in your
answer to (a) (i)–(iv) above to be more informative for managerial purposes.
(4 marks)
(b) Explain the meaning and use of a ‘rolling forecast’. (2 marks)
(Total 15 marks)
CIMA State 2 Cost Accounting

128 STANDARD COSTING AND VARIANCE ANALYSIS: 1

Data Question IM 18.2
You are employed as the assistant management accountant in the group accoun- Intermediate:
tant’s office of Hampstead plc. Hampstead recently acquired Finchley Ltd, a small Reconciliation of
company making a specialist product called the Alpha. Standard marginal costing is standard and
used by all the companies within the group and, from 1 August, Finchley Ltd will actual cost for a
also be required to use standard marginal costing in its management reports. Part of variable costing
your job is to manage the implementation of standard marginal costing at Finchley system
Ltd.
John Wade, the managing director of Finchley, is not clear how the change will
help him as a manager. He has always found Finchley’s existing absorption costing
system sufficient. By way of example, he shows you a summary of its management
accounts for the three months to 31 May. These are reproduced below.

Statement of budgeted and actual cost of Alpha Production –

3 months ended 31 May
Alpha
production Actual Budget Variance
(units) 10 000 12 000

Inputs (£) Inputs (£) (£)

Materials 32 000 metres 377 600 36 000 metres 432 000 54 400
Labour 70 000 hours 422 800 72 000 hours 450 000 27 200
Fixed overhead
absorbed 330 000 396 000 66 000
Fixed overhead
unabsorbed 0 075 000 0 00 00 00 (75 000)
1 205 400 1 278 000 72 600

John Wade is not convinced that standard marginal costing will help him to man-
age Finchley. ‘My current system tells me all I need to know,’ he said. ‘As you can
see, we are £72 600 below budget which is really excellent given that we lost pro-
duction as a result of a serious machine breakdown.’
To help John Wade understand the benefits of standard marginal costing, you
agree to prepare a statement for the three months ended 31 May reconciling the
standard cost of production to the actual cost of production.
Task 1
(a) Use the budget data to determine:
(i) the standard marginal cost per Alpha; and
(ii) the standard cost of actual Alpha production for the three months to
31 May.
(b) Calculate the following variances:
(i) material price variance;
(ii) material usage variance;
(iii) labour rate variance;
(iv) labour efficiency variance;
(v) fixed overhead expenditure variance.
(c) Write a short memo to John Wade. Your memo should:
(i) include a statement reconciling the actual cost of production to the stan-
dard cost of production;
(ii) give two reasons why your variances might differ from those in his origi-
nal management accounting statement despite using the same basic data;
(iii) briefly discuss one further reason why your reconciliation statement pro-
vides improved management information.
Data
On receiving your memo, John Wade informs you that:
• the machine breakdown resulted in the workforce having to be paid for 12 000

STANDARD COSTING AND VARIANCE ANALYSIS: 1 129

 hours even though no production took place;
• an index of material prices stood at 466.70 when the budget was prepared but at
420.03 when the material was purchased.
Task 2
Using this new information, prepare a revised statement reconciling the standard
cost of production to the actual cost of production. Your statement should subdivide:
• both the labour variances into those parts arising from the machine breakdown
and those parts arising from normal production; and
• the material price variance into that part due to the change in the index and that
part arising for other reasons.
Data
Barnet Ltd is another small company owned by Hampstead plc. Barnet operates a
job costing system making a specialist, expensive piece of hospital equipment.
Existing system
Currently, employees are assigned to individual jobs and materials are requisi-
tioned from stores as needed. The standard and actual costs of labour and material
are recorded for each job. These job costs are totalled to produce the marginal cost
of production. Fixed production costs – including the cost of storekeeping and
inspection of deliveries and finished equipment – are then added to determine the
standard and actual cost of production. Any costs of remedial work are included in
the materials and labour for each job.
Proposed system
Carol Johnson, the chief executive of Barnet, has recently been to a seminar on
modern manufacturing techniques. As a result, she is considering introducing Just-
in-Time stock deliveries and Total Quality Management. Barnet would offer sup-
pliers a long-term contract at a fixed price but suppliers would have to guarantee
the quality of their materials.
In addition, she proposes that the workforce is organised as a single team with
flexible work practices. This would mean employees helping each other as neces-
sary, with no employee being allocated a particular job. If a job was delayed, the
workforce would work overtime without payment in order for the job to be com-
pleted on time. In exchange, employees would be guaranteed a fixed weekly wage
and time off when production was slack to make up for any overtime incurred.
Cost of quality
Carol has asked to meet you to discuss the implications of her proposals on the
existing accounting system. She is particularly concerned to monitor the cost of
quality. This is defined as the total of all costs incurred in preventing defects plus
those costs involved in remedying defects once they have occurred. It is a single
figure measuring all the explicit costs of quality that is, those costs collected within
the accounting system.
Task 3
In preparation for the meeting, produce brief notes. Your notes should:
(a) identify four general headings (or classifications) which make up the cost of
quality;
(b) give one example of a type of cost likely to be found within each category;
(c) assuming Carol Johnson’s proposals are accepted, state, with reasons, whether
or not:
(i) a standard marginal costing system would still be of help to the managers;
(ii) it would still be meaningful to collect costs by each individual job;
(d) identify one cost saving in Carol Johnson’s proposals which would not be
recorded in the existing costing system.
AAT Technicians Stage

130 STANDARD COSTING AND VARIANCE ANALYSIS: 1

You are the management accountant of T plc. The following computer printout Question IM 18.3
shows details relating to April: Intermediate:
Calculation of
Actual Budget labour, material
and overhead
Sales volume 4900 units 5000 units variances and
Selling price per unit £11.00 £10.00 reconciliation of
Production volume 5400 units 5000 units budgeted and
Direct materials actual profit
kgs 10 600 10 000
price per kg £0.60 £0.50
Direct labour
hours per unit 0.55 0.50
rate per hour £3.80 £4.00
Fixed overhead:
Production £10 300 £10 000
Administration £3 100 £3 000

T plc uses a standard absorption costing system.

There was no opening or closing work-in-progress.
Requirements:
(a) Prepare a statement which reconciles the budgeted profit with the actual profit
for April, showing individual variances in as much detail as the above data
permit (20 marks)
(b) Explain briefly the possible causes of
(i) the material usage variance;
(ii) the labour rate variance; and
(iii) the sales volume profit variance. (6 marks)
(c) Explain the meaning and relevance of interdependence of variances when
reporting to managers. (4 marks)
(Total 30 marks)
CIMA Stage 2 Operational Cost Accounting

A manufacturing company has provided you with the following data, which relate Question IM 18.4
to component RYX for the period which has just ended: Intermediate:
Computation of
Budget Actual fixed overhead
variances
Number of labour hours 8 400 7 980
Production units 1 200 1 100
Overhead cost (all fixed) £22 260 £25 536

Overheads are absorbed at a rate per standard labour hour.

Required:
(a) (i) Calculate the fixed production overhead cost variance and the following
subsidiary variances:
expenditure
efficiency
capacity
(ii) Provide a summary statement of these four variances. (7 marks)
(b) Briefly discuss the possible reasons why adverse fixed production overhead
expenditure, efficiency and capacity variances occur. (10 marks)
(c) Briefly discuss two examples of interrelationships between the fixed production
overhead efficiency variances and the material and labour variances. (3 marks)
(Total 20 marks)
ACCA Paper 8 Managerial Finance

STANDARD COSTING AND VARIANCE ANALYSIS: 1 131

Question IM 18.5 Data
Intermediate: The Eastern Division of Countryside Communications plc assembles a single prod-
Labour and uct, the Beta. The Eastern Division has a fixed price contract with the supplier of
overhead the materials used in the Beta. The contract also specifies that the materials should
variances and be free of any faults. Because of these clauses in the contract, the Eastern Division
export wage rate has no material variances when reporting any differences between standard and
analysis actual production.
You have recently accepted the position of assistant management accountant in
the Eastern Division. One of your tasks is to report variances in production costs on
a four-weekly basis. Fixed overheads are absorbed on the basis of standard labour
hours. A colleague provides you with the following data:

Standard costs and budgeted production – four weeks ended 27 November

Standard
Quantity Unit price cost per Beta

Material 30 metres £12.00 £360.00

Labour 10 hours £5.25 £52.50
Fixed overhead 10 hours £15.75 £157.50
Standard cost per Beta £570.00
Budgeted production 1200 Betas £570.00 £684 000

Actual production – four weeks ended 27 November

Quantity Total cost

Actual cost of material 31 200 metres £374 400

Actual cost of labour 11 440 hours £59 488
Actual fixed cost overheads £207 000
Actual cost of actual production £640 888
Actual production 1040 Betas

Task 1
(a) Calculate the following variances:
(i) the labour rate variance;
(ii) the labour efficiency variance (sometimes called the utilisation variance);
(iii) the fixed overhead expenditure variance (sometimes known as the price
variance);
(iv) the fixed overhead volume variance;
(v) the fixed overhead capacity variance;
(vi) the fixed overhead efficiency variance (sometimes known as the usage
variance).
(b) Prepare a statement reconciling the standard cost of actual production with the
actual cost of actual production.
Data
When the Eastern Division’s budget for the four weeks ended 27 November was
originally prepared, a national index of labour rates stood at 102.00. In preparing
the budget, Eastern Division had allowed for a 5% increase in labour rates. For the
actual four weeks ended 27 November, the index stood at 104.04.
Because of this, Ann Green, Eastern Division’s production director, is having dif-
ficulty understanding the meaning of the labour rate variance calculated in task 1.
Task 2
Write a memo to Ann Green. Your memo should:
(a) identify the original labour rate before allowing for the 5% increase;
(b) calculate the revised standard hourly rate using the index of 104.04;

132 STANDARD COSTING AND VARIANCE ANALYSIS: 1

(c) subdivide the labour rate variance calculated in task 1(a) into that part due to
the change in the index and that part arising for other reasons;
(d) briefly interpret the possible meaning of these two subdivisions of the labour
rate variance;
(e) give two reasons why the index of labour rates might not be valid in explaining
part of the labour rate variance;
(f) briefly explain the meaning of the following variances calculated in task 1 and
for each variance suggest one reason why it may have occurred;
(i) the fixed overhead expenditure (or price) variance;
(ii) the fixed overhead capacity variance;
(iii) the fixed overhead efficiency (or usage) variance.
AAT Technicians Stage

(a) Explain fully how the variances between actual and standard production Question IM 18.6
overhead costs may be analysed, where overhead absorption is based upon Intermediate:
separate direct labour hour rates for variable and fixed overheads. (12 marks) Discussion and
(b) Calculate fixed production overhead variances in as much detail as possible, in calculation of
the following situation: overhead
Budget Actual variances
Fixed overhead (£) 246 000 259 000
Direct labour (hours) 123 000 141 000
Output (units) 615 000 (see below)

The company operates a process costing system. At the beginning of the period
42 000 half completed units were in stock. During the period 680 000 units were
completed and 50 000 half completed units remained in stock at the end of the
period. (13 marks)
(Total 25 marks)
ACCA Level 1 Costing

The following profit reconciliation statement has been prepared by the management Question IM 18.7
accountant of ABC Limited for March: Calculation of
(£) actual input data
working back
Budgeted profit 30 000 from variances
Sales volume profit variance 5 250A
Selling price variance 6 375F
31 125
Cost variances: A F
(£) (£)
Material:
price 1 985
usage 400
Labour:
rate 9 800
efficiency 4 000
Variable overhead:
expenditure 1 000
efficiency 1 500
Fixed overhead:
expenditure 500
volume 24 500
31 985 11 700
20 285A
Actual profit 10 840

STANDARD COSTING AND VARIANCE ANALYSIS: 1 133

 The standard cost card for the company’s only product is as follows:
(£)

Materials 5 litres at £0.20 1.00

Labour 4 hours at £4.00 16.00
Variable overhead 4 hours at £1.50 6.00
Fixed overhead 4 hours at £3.50 14.00
37.00
Standard profit 03.00
Standard selling price 40.00
The following information is also available:
1. There was no change in the level of finished goods stock during the month.
2. Budgeted production and sales volumes for March were equal.
3. Stocks of materials, which are valued at standard price, decreased by 800 litres
during the month.
4. The actual labour rate was £0.28 lower than the standard hourly rate.
Required:
(a) Calculate the following:
(i) the actual production/sales volume; (4 marks)
(ii) the actual number of hours worked; (4 marks)
(iii) the actual quantity of materials purchased; (4 marks)
(iv) the actual variable overhead cost incurred; (2 marks)
(v) the actual fixed overhead cost incurred. (2 marks)
(b) ABC Limited uses a standard costing system whereas other organizations use a
system of budgetary control. Explain the reasons why a system of budgetary
control is often preferred to the use of standard costing in non-manufacturing
environments. (9 marks)
(Total 25 marks)
CIMA Stage 2 Operational Cost Accounting

Question IM 18.8 The following data have been collected for the month of April by a company which
Intermediate: operates a standard absorption costing system:
Calculation of Actual production of product EM 600 units
inputs working Actual costs incurred: (£)
backwards from Direct material E 660 metres 6 270
variances Direct material M 200 metres 650
Direct wages 3200 hours 23 200
Variable production overhead (which
varied with hours worked) 6 720
Fixed production overhead 27 000
Variances (£)
Direct material price:
Material E 330 F
Material M 50 A
Direct material usage:
Material E 600 A
Material M nil
Direct labour rate 800 A
Direct labour efficiency 1400 A
Variable production overhead:
expenditure 320 A
efficiency 400 A
Fixed production overhead:
expenditure 500 F
volume 2500 F

134 STANDARD COSTING AND VARIANCE ANALYSIS: 1

Opening and closing work in progress figures were identical, so can be ignored.
You are required to:
(a) prepare for the month of April a statement of total standard costs for product
EM; (3 marks)
(b) prepare a standard product cost sheet for one unit of product EM; (7 marks)
(c) calculate the number of units of product EM which were budgeted for April;
(2 marks)
(d) state how the material and labour cost standards for product EM would
originally have been determined. (3 marks)
(Total 15 marks)
CIMA Stage 2 Cost Accounting

(a) A factory is planning to produce and sell 8000 units of product P during the Question IM18.9
next 4-week operating period. Advanced:
Its standard product unit and total costs are as follows: Preparation of an
operating control
Costs per unit Total costs statement and the
(£) (£) computation of
Direct material 1.111 units at £5.40/unit 6.00 48 000
labour, material
Direct labour 0.6 hours at £5.00/hour 3.00 24 000
and overhead
Variable overhead 0.6 hours at £0.50/hour 0.30 2 400
variances
Fixed overhead 5.95 47 600
The product sells for £16.50/unit.
The following details relate to the actual results for the 4-week period:
Actual orders received for the 4-week period: 8200 units
Actual sales: 7500 units
Actual production: 7500 units
Units of direct material purchased and issued into production: 7750 units
Direct material price per unit: 5.60
Direct labour hours: 4700
Direct labour rate (per hour): £5.25

Total overhead expenditure amounted to £49 000 of which variable overhead

was £2150.
You are required to
(i) produce an Operating Control Statement which analyses the budget:
actual comparisons for the four-week period; (7 marks)
(ii) arrange the results you have produced in a way which will improve man-
agement’s understanding and interpretation of their meaning, explaining
the basis of the presentation you have adopted. (8 marks)
(b) Some consider that the key to fair assessment of management performance is
provided by the concept of controllability, i.e. measurements should be based
on factors over which management has control. However, identifying
controllability may raise complex issues.
You are required to discuss the management accounting problems which
arise in attributing performance to managers in a manner which recognizes
controllability. (10 marks)
(Total 25 marks)
CIMA Stage 4 Management Accounting Control and Audit

STANDARD COSTING AND VARIANCE ANALYSIS: 1 135

Question IM 18.10 Bamfram plc is a well established manufacturer of a specialized product, a Wallop,
Advanced: which has the following specifications for production:
Variance
calculations and Components Standard quantity Standard price(£)
reconciliation of
budgeted and WALS 15 60
actual profit LOPS 8 75

The standard direct labour hours to produce a Wallop at the standard wage rate of
£10.50 per hour has been established at 60 hours per Wallop.
The annual fixed overhead budget is divided into calendar months with equal
production per month. The budgeted annual fixed overheads are £504 000 for the
budgeted output of 2400 Wallops per annum.
Mr Jones, a marketing person, is now the managing director of Bamfram plc and
must report to the board of directors later this day and he seeks your advice in
respect of the following operating information for the month of May:

(£) (£)

Sales 504 000

Cost of sales:
Direct materials 281 520
Direct labour 112 320
393 840
Fixed production overheads 042 600 436 440
Gross profit 67 560
Administration expenses 11 150
Selling and distribution expenses 017 290
Net profit 039 120

The sales manager informs Mr Jones that despite adverse trading conditions his
sales staff have been able to sell 180 Wallops at the expected standard selling price.
The production manager along with the purchasing department manager are
also pleased that prices for components have been stable for the whole of the cur-
rent year and they are able to provide the following information:
Stocks for May are as follows:

1 May 31 May

Component WALS 600 750

Component LOPS 920 450

The actual number of direct labour hours worked in May was 11 700, considerably
less than the production manager had budgeted. Further, the purchasing manager
advised that WALS had cost £171 000 at a price of £57 per unit in the month of May
and 1000 LOPS had been acquired for £81 000.
Mr Jones, eager to please the board of directors, requests you, as the newly
appointed management accountant, to prepare appropriate statements to highlight
the following information which is to be presented to the board:
(a) The standard product cost of a Wallop. (3 marks)
(b) (i) The direct material variances for both price and usage for each component
used in the month of May assuming that prices were stable throughout
the relevant period.
(ii) The direct labour efficiency and wage rate variances for the month of
May.
(iii) The fixed production overhead expenditure and volume variances.
Note: You may assume that during the month of May there is no change in
the level of finished goods stocks. (10 marks)

136 STANDARD COSTING AND VARIANCE ANALYSIS: 1

(c) A detailed reconciliation statement of the standard gross profit with the actual
gross profit for the month of May. (4 marks)
(d) Draft a brief report for Mr Jones that he could present to the board of directors
on the usefulness, or otherwise, of the statement you have prepared in your
answer to (c) above. (5 marks)
(Total 22 marks)
ACCA Level 2 Management Accounting

Tardy Taxis operates a fleet of taxis in a provincial town. In planning its operations Question IM 18.11
for November it estimated that it would carry fare-paying passengers for 40 000 Advanced:
miles at an average price of £1 per mile. However, past experience suggested that Computation of
the total miles run would amount to 250% of the fare-paid miles. At the beginning variances and the
of November it employed ten drivers and decided that this number would be ade- reconciliation of
quate for the month ahead. budgeted and
The following cost estimates were available: actual profits for a
Employment costs of a driver £1000 per month taxi firm
Fuel costs £0.08 per mile run
Variable overhead costs £0.05 per mile run
Fixed overhead costs £9000 per month

In November revenue of £36 100 was generated by carrying passengers for 38 000
miles. The total actual mileage was 105 000 miles. Other costs amounted to:
Employment costs of drivers £9600
Fuel costs £8820
Variable overhead costs £5040
Fixed overhead costs £9300

The saving in the cost of drivers was due to one driver leaving during the month;
she was not replaced until early December.
Requirements:
(a) Prepare a budgeted and actual profit and loss account for November,
indicating the total profit variance. (6 marks)
(b) Using a flexible budget approach, construct a set of detailed variances to
explain the total profit variance as effectively as possible. Present your analysis
in a report to the owner of Tardy Taxis including suggested reasons for the
variances. (14 marks)
(c) Outline any further variances you think would improve your explanation,
indicating the additional information you would require to produce these.
(5 marks)
(Total 25 marks)
ICAEW P2 Management Accounting

STANDARD COSTING AND VARIANCE ANALYSIS: 1 137

Question IM 18.12 Claylock Ltd make and sell a single product. The company operates a standard cost
Advanced: system and the following information is available for period 5:
Calculation of (i) Standard product cost per unit: (£)
sales variances Direct material 8 kilos at £5.40 per kilo 43.20
on an absorption Direct labour 2.5 hours at £4.50 per hour 11.25
and variable Fixed production overhead 17.00
costing basis and (ii) The standard selling price per unit is £90.
reconciliation of (iii) Direct labour hours worked total 12 000 hours. Labour productivity in compar-
actual with ison to standard was 90%.
budgeted margin (iv) 42 000 kilos of direct material were purchased at £5.60 per kilo. Issues from
stores to production totalled 36 000 kilos during the period.
(v) Stocks of finished goods rose from nil to 300 units during the period. It was
budgeted that all units produced would be sold during the period.
(vi) Stocks of raw materials and finished goods are valued at standard cost.
(vii) Summary operating statement for period 5:
(£)

Budgeted sales revenue 450 000

Sales volume variance 088 200 (A)
Standard sales revenue 361 800
Less: Standard cost of sales 287 229
Standard production margin 74 571
(F) (A)
Variance analysis: (£) (£)
Sales price 30 150
Direct material cost 16 176
Fixed overhead volume 11 560
Fixed overhead expenditure 01 500 00 000
31 650 27 736 003 914 (F)
Actual production margin 78 485
Note: (F) = favourable (A) = adverse.
Required:
(a) Determine the values of the sales volume variance when it is expressed
alternatively in terms of: standard revenue; standard production margin; and
standard contribution. Discuss which valuation, when combined with the sales
price variance, provides a measure of whether the sales variance have resulted
in a net cash benefit to the company. (9 marks)
(b) Analyse the direct material cost variance into relevant sub-variances and
comment on the method by which material usage is valued by Claylock Ltd.
(7 marks)
(c) Analyse the fixed overhead volume variance into two sub-variances and
comment on the relevance of each sub-variance as perceived by adherents of
absorption costing. (7 marks)
(d) Prepare an operating statement for period 5 which amends the statement
given in the question into standard marginal cost format. Explain the reason
for any difference in the actual production margin from that reported under
the present system. Comment also on any changes in the variances reported in
the amended statement. (7 marks)
(Total 30 marks)
ACCA Level 2 Cost and Management Accounting II

138 STANDARD COSTING AND VARIANCE ANALYSIS: 1