Lecture 15
Lecture 15
Lecture 15
When the sales director reviewed the results for April in the light of
the market conditions that had been experienced during the month,
she believed that D Limited should have sold 600 units of this drum
at a price of £82 each. The actual sales achieved were 600 units at
£86 per unit.
Calculate the following variances for this particular drum for April:
2
Question
A company has a process in which the standard mix for producing 9
litres of output is as follows:
$
4.0 litres of D at $9 per litre 36·00
3·5 litres of E at $5 per litre 17·50
2·5 litres of F at $2 per litre 5·00
58·50
A standard loss of 10% of inputs is expected to occur. The actual
inputs for the latest period were:
$
4,300 litres of D at $9·00 per litre 38,700
3,600 litres of E at $5·50 per litre 19,800
2,100 litres of F at $2·20 per litre 4,620
63,120
3
Actual output for this period was 9,100 litres.
Answer 10:
Actual usage in standard proportions $
D= 4,000 litres at $9 per litre 36,000
E= 3,500 litres at $5 per litre 17,500
F= 2,500 litres at $2 per litre 5,000
10,000 58,500 (1)
5
Question
(a) A company uses variance analysis to monitor the performance of
the team of workers which assembles Product M. Details of the
budgeted and actual performance of the team for last period were
as follows:
Budget Actual
Output of product M 600 units 680 units
Wage rate £30 per hour £32 per hour
Labour hours 900 hours 1,070 hours
It has now been established that the standard wage rate should have
been £31·20 per hour.
(i) Calculate the labour rate planning variance and calculate the
operational labour efficiency variance.
(ii) Explain the major benefit of analyzing variances into planning
and operational components. 6
(b) Briefly explain three limitations of standard costing in the
modern business environment.
(c) Briefly explain three factors that should be considered before
deciding to investigate a variance.
Answer to (a)
Difference in standard wage rate = £1·20 per hour
Planning variance (standard hours for actual output) x difference in
wage rate
680 x (900/600) x £1·20
1,020 x £1·20
£1,224 Adverse
Operational efficiency (standard hours for actual output – actual hours) x
Variance revised wage rate
(1,020 - 1,070) x £31·20
50 x £31·20
£1,560 Adverse 7
(ii) The major benefit of analysing the variances into planning and
operational components is that the revised standard should
provide a realistic standard against which to measure
performance. Any variances should then be a result of
operational management efficiencies and inefficiencies and not
faulty planning.
Answer to (b)
The main limitations of standard costing in the modern business
environment are as follows:
11
Question
Dynamic manufacturers Ltd. produces a single product whose standard
cost is as shown below:
Standard
Unit Cost
Rs.
Raw materials (5 kg. @ Rs. 20 per Kg.) 100
Labor (4 hours @ Rs. 5) 20
Variable overheads (Rs. 3 per direct labor hour) 12
Fixed overheads (Rs. 6 per direct labor hour) 24
Standard Unit Cost 156
The standard selling price is Rs. 200 per unit and total marketing and
administration expenses (Rs. 10 per unit)Which are all basically fixed
amount to Rs. 500,000 p.a.
The Overheads are allocated on the basis of budgeted production of
50,000 units p.a.
During the year the company produced 40,000 units and the following
results were achieved:
Rs. (000) Rs. (000)
Sales 84,000
Cost of sales:
Direct materials (208,000 Kg) 4,368
Labor (152,000 hours) 988
Variable overheads 456
Fixed overheads 1,250 7,062
Gross margin 1,338
Less: Selling and Admn. Exp. 450
Profit for the year 888
Required:
a. A detailed cost variance analysis.
b. Reconciliation of budgeted profit with realized profit.
c. Criticisms against the traditional variance analysis as a tool for
planning and control and suggestions advanced for its
improvement.
Answer 12):
a. A detailed cost variance analysis.
15
Labor Rate Variance
Actual hours worked x (St. Rate – Actual Rate)
(152,000 hrs x (5 – 6.50) = Rs. 228,000 (A)
Suggestions:
1. To Calculate planning and operating variance.
2. To investigate variance which justify on cost and benefit criteria.
3. To feedback and review.