LE 3.

Chanti Limited manufacturers and sells a single product. The company uses standard costing
system, and the standard cost per unit $7.40 and the budgeted selling price is $16.00 unit.

Budgeted production and sales for 20X8 were 5,000 units, which was based on expected market
share of 25%. The budgeted fixed cost were $20,000.

Actual production in 2008 were 5,200 units and 5,100 were sold for $81,000.

The industry sales decreased to 18,000 units.

Calculate the sales volume planning variance and sales volume operational variance.
LE 3.2

Chanti Limited manufacturers and sells a single product. The company uses standard costing
system, and the standard cost per unit $7.40 and the budgeted selling price is $16.00 unit. Budgeted
production and sales for 20X8 were 5,000 units.

Chanti’s market share improved by 3.3333% to 28.3333% but the overall industry sales were
10% lowered than forecast.

Calculate the sales volume planning variance and sales volume operational variance.
5 Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The standard
cost of labour for each pair is $42 and the standard labour time for each pair is three hours. In the last quarter,
Glove Co had budgeted production of 12,000 pairs, although actual production was 12,600 pairs in order to
meet demand. 37,000 hours were used to complete the work and there was no idle time. The total labour cost
for the quarter was $531,930.
At the beginning of the last quarter, the design of the gloves was changed slightly. The new design required
workers to sew the company’s logo on to the back of every glove made and the estimated time to do this was
15 minutes for each pair. However, no-one told the accountant responsible for updating standard costs that
the standard time per pair of gloves needed to be changed. Similarly, although all workers were given a 2%
pay rise at the beginning of the last quarter, the accountant was not told about this either. Consequently, the
standard was not updated to reflect these changes.
When overtime is required, workers are paid 25% more than their usual hourly rate.

Required:
(a) Calculate the total labour rate and total labour efficiency variances for the last quarter. (2 marks)

(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows. (6 marks)

(c) Assess the performance of the production manager for the last quarter. (7 marks)

(15 marks)

6
2 Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made
in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for each batch is
$6·00 and the standard labour time for each batch is half an hour. In November, Truffle Co had budgeted production
of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work
and there was no idle time. All workers were paid for their actual hours worked. The actual total labour cost for
November was $136,800. The production manager at Truffle Co has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the choice of either
accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept
the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented
immediately and made the chocolates more difficult to shape. When recipe changes such as these are made,
it takes time before the workers become used to working with the new ingredient mix, making the process 20%
slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the
system outside of this.

Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the standard cost
provided above. (4 marks)

(b) Analyse the total labour rate and total labour efficiency variances into component parts for planning and
operational variances in as much detail as the information allows. (8 marks)

(c) Assess the performance of the production manager for the month of November. (8 marks)

(20 marks)

3 [P.T.O.
3 Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary
workers, whom it hires on three-month contracts whenever production requirements increase. All buying of
materials is the responsibility of the company’s purchasing department and the company’s policy is to hold low
levels of raw materials in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the
selling prices for its products once an initial cost card has been drawn up. Prices are then reviewed on a
quarterly basis. Detailed variance reports are produced each month for sales, material costs and labour costs.
Departmental managers are then paid a monthly bonus depending on the performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up
to include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the
product during the first month of production was 460 units and the actual time taken to manufacture the
product totalled 1,860 hours at a total cost of $26,040.
After being presented with some initial variance calculations, the production manager has realised that the
standard time per unit of seven hours was the time taken to produce the first unit and that a learning rate of
90% should have been anticipated for the first 1,000 units of production. He has consequently been criticised
by other departmental managers who have said that, ‘He has no idea of all the problems this has caused.’

Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance
AFTER taking account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520 (5 marks)

(b) Discuss the likely consequences arising from the production manager’s
failure to take into account the
learning effect before production commenced. (5 marks)

(10 marks)

10
5 Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-time
system and holds no inventories.
2
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m . Each bed
2 2
sheet uses 2 m of cotton and each pillowcase uses 0·5 m . Production levels for bed sheets and pillowcases
for November were as follows:
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
2 2
The actual cost of the cotton in November was $5·80 per m . 248,000 m of cotton was used to make the bed
2
sheets and 95,000 m was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning of the
month, the hotel chain made an unexpected request for an immediate design change to the pillowcases. The
new design required 10% more cotton than previously. It also resulted in production delays and therefore a
shortfall in production of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.

Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)

(b) Assess the performance of the production manager for the month of November. (8 marks)

(20 marks)

6
ALL FIVE questions are compulsory and MUST be attempted

1 Secure Net (SN) manufacture security cards that restrict access to government owned buildings around the world.

The standard cost for the plastic that goes into making a card is $4 per kg and each card uses 40g of plastic
after an allowance for waste. In November 100,000 cards were produced and sold by SN and this was well
above the budgeted sales of 60,000 cards.
The actual cost of the plastic was $5·25 per kg and the production manager (who is responsible for all buying and
production issues) was asked to explain the increase. He said ‘World oil price increases pushed up plastic prices by 20%
compared to our budget and I also decided to use a different supplier who promised better quality and increased reliability
for a slightly higher price. I know we have overspent but not all the increase in plastic prices is my fault’
The actual usage of plastic per card was 35g per card and again the production manager had an explanation. He said ‘The
world-wide standard size for security cards increased by 5% due to a change in the card reader technology, however, our
new supplier provided much better quality of plastic and this helped to cut down on the waste.’
SN operates a just in time (JIT) system and hence carries very little inventory.

Required:
(a) Calculate the total material price and total material usage variances ignoring any possible planning error in
the figures. (4 marks)

(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows. (8 marks)

(c) Assess the performance of the production manager. (8 marks)

(20 marks)

2
4 Lock Co makes a single product – a lock – and uses marginal costing. The standard cost card for one unit is as follows:

Standard cost card $

Selling price 80
–––
Direct materials (4 kg at $3 per kg) 12
Direct labour (2 hours at $10 per hour) 20
Variable overhead (2 hours at $2 per hour) 4
–––
Marginal cost 36
–––
A junior member of the accounts team produced the following variance statement for the month of May.

Budget Actual Variances

(1,000 units) (960 units)
$ $ $
Sales 80,000 76,800 3,200 Adv
Less: Marginal cost
Direct materials (12,000) (11,126) 874 Fav
Direct labour (20,000) (18,240) 1,760 Fav
Variable overheads (4,000) (3,283) 717 Fav
––––––– ––––––– ––––
Contribution 44,000 44,151 151 Fav
––––––– ––––––– ––––
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)

(20 marks)

5 [P.T.O.
Section C – Both questions are compulsory and MUST be attempted

Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

31 Carad Co is an electronics company which makes two types of television – plasma screen TVs and LCD TVs.
It operates within a highly competitive market and is constantly under pressure to reduce prices. Carad Co
operates a standard costing system and performs a detailed variance analysis of both products on a monthly
basis. Extracts from the management information for the month of November are shown below:
Note
Total number of units made and sold 1,400 1
Material price variance $28,000 A 2
Total labour variance $6,050 A 3
Notes
(1) The budgeted total sales volume for TVs was 1,180 units, consisting of an equal mix of plasma screen
TVs and LCD screen TVs. Actual sales volume was 750 plasma TVs and 650 LCD TVs. Standard sales
prices are $350 per unit for the plasma TVs and $300 per unit for the LCD TVs. The actual sales prices
achieved during November were $330 per unit for plasma TVs and $290 per unit for LCD TVs. The
standard contributions for plasma TVs and LCD TVs are $190 and $180 per unit respectively.
(2) The sole reason for this variance was an increase in the purchase price of one of its key components, X.
Each plasma TV made and each LCD TV made requires one unit of component X, for which Carad Co’s
standard cost is $60 per unit. Due to a shortage of components in the market place, the market price for
November went up to $85 per unit for X. Carad Co actually paid $80 per unit for it.
(3) Each plasma TV uses 2 standard hours of labour and each LCD TV uses 1·5 standard hours of labour. The
standard cost for labour is $14 per hour and this also reflects the actual cost per labour hour for the company’s
permanent staff in November. However, because of the increase in sales and production volumes in November,
the company also had to use additional temporary labour at the higher cost of $18 per hour. The total capacity
of Carad’s permanent workforce is 2,200 hours production per month, assuming full efficiency. In the month of
November, the permanent workforce were wholly efficient, taking exactly 2 hours to complete each plasma TV
and exactly 1·5 hours to produce each LCD TV. The total labour variance therefore relates solely to the
temporary workers, who took twice as long as the permanent workers to complete their production.

Required:
(a) Calculate the following for the month of November, showing all workings clearly:
(i) The sales price variance and sales volume contribution variance; (4 marks)

(ii) The material price planning variance and material price operational variance; (2 marks)

(iii) The labour rate variance and the labour efficiency variance. (5 marks)

(b) Explain the reasons why Carad Co would be interested in the material price
planning variance and the
material price operational variance. (9 marks)

(20 marks)

14
3 Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits,
including detailed budgets for sales, materials and labour. If appropriate, the departmental managers are
allowed to revise their budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions. At a
recent board meeting he said ‘There seems little point budgeting any more. Every time we have a problem the
budgets are revised to leave me looking at a favourable operational variance report and at the same time a lot
less profit than promised.’
Required:

(a) Describe the circumstances when a budget revision should be allowed and when it should be refused.
(5 marks)

Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike Co’s buyer managed to find another supplier, 150
miles away at short notice. This second supplier charged more for the material and a supplementary delivery
charge on top. The buyer agreed to both the price and the delivery charge without negotiation. ‘I had no
choice’, the buyer said, ‘the production manager was pushing me very hard to find any solution possible!’ Two
months later, another, more competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
Labour
During the early part of the year, problems had been experienced with the quality of work being produced by
the support staff in the labour force. The departmental manager had complained in his board report that his
team were ‘unreliable, inflexible and just not up to the job’.
It was therefore decided, after discussion of the board report, that something had to be done. The company
changed its policy so as to recruit only top graduates from good quality universities. This has had the effect of
pushing up the costs involved but increasing productivity in relation to that element of the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved
following the change of policy.

Required:
(b) Discuss each request for a budget revision, putting what you see as both sides of the argument and reach a
conclusion as to whether a budget revision should be allowed. (8 marks)

6
The market for leather bound diaries has been shrinking as the electronic versions become more widely available and
easier to use. Spike Co has produced the following data relating to leather bound diary sales for the year to date:
Budget
Sales volume 180,000 units
Sales price $17·00 per unit
Standard contribution $7·00 per unit
The total market for diaries in this period was estimated in the budget to be 1·8m units. In fact, the actual total
market shrank to 1·6m units for the period under review.
Actual results for the same period
Sales volume 176,000 units
Sales price $16·40 per unit

Required:
(c) Calculate the total sales price and total sales volume variance. (4 marks)

(d) Analyse the total sales volume variance into components for market size and market share. (4 marks)

(e) Comment on the sales performance of the business. (4 marks)

(25 marks)

7 [P.T.O.
Section C – Both questions are compulsory and MUST be attempted

Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

31 The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is with the
Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the same school uniform.
After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-
designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is
10% more material than the previous style of dress required. However, a new material has also been chosen
by the GPST which costs only $2·85 per metre which is 5% cheaper than the material used on the previous
dresses. In February, the total amount of material used and purchased at this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used.
Consequently, all staff required training before they could begin production. The manager of the sewing
department expected each of the new dresses to take 10 minutes to make as compared to 8 minutes per
dress for the old style. SU Co has 24 staff, each of whom works 160 hours per month and is paid a wage of
$12 per hour. All staff worked all of their contracted hours in February on production of the GPST dresses and
there was no idle time. No labour rate variance arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co uses
standard costing and usually, every time a design change takes place, the standard cost card is updated prior to
production commencing. However, the company accountant responsible for updating the standards has been off
sick for the last two months. Consequently, the standard cost card for the new dress has not yet been updated.

Required:
(a) Calculate the material variances in as much detail as the information allows for the month of February.
(7 marks)

(b) Calculate the labour efficiency variances in as much detail as the information allows for the month of
February. (5 marks)

(c) Assess the performance of the production manager for the month of February. (8 marks)

(20 marks)

3 [P.T.O.
4 Block Co operates an absorption costing system and sells three types of product – Commodity 1, Commodity 2 and
Commodity 3. Like other competitors operating in the same market, Block Co is struggling to maintain revenues and
profits in face of the economic recession which has engulfed the country over the last two years. Sales prices
fluctuate in the market in which Block Co operates. Consequently, at the beginning of each quarter, a market
specialist, who works on a consultancy basis for Block Co, sets a budgeted sales price for each product for the
quarter, based on his expectations of the market. This then becomes the ‘standard selling price’ for the quarter. The
sales department itself is run by the company’s sales manager, who negotiates the actual sales prices with
customers. The following budgeted figures are available for the quarter ended 31 May 2013.

Product Budgeted production Standard selling price Standard variable

and sales units per unit production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28·40
Commodity 3 26,000 $41·60 $26·40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine
hours and the budgeted cost of these for the quarter ended 31 May 2013 was $174,400. Commodity 1, 2 and
3 use 0·2 hours, 0·6 hours and 0·8 hours of machine time respectively.
The following data shows the actual sales prices and volumes achieved for each product by Block Co for the
quarter ended 31 May 2013 and the average market prices per unit.
Product Actual production and Actual selling price Average market price
sales units per unit per unit
Commodity 1 29,800 $31 $32·20
Commodity 2 30,400 $34 $33·15
Commodity 3 25,600 $40·40 $39·10
The following variances have already been correctly calculated for Commodities 1 and 2:
Sales price operational variances
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse

Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning variance.
(4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and the total sales
quantity variance. (11 marks)

(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for the quarter
ended 31 May 2013. (5 marks)

(20 marks)

5 [P.T.O.