Rs. per unit Direct materials 8 Direct labour 6 Fixed production overheads 12 oo — a ‘Question bank: Objective test an long-form questions CHAPTER 10 - VARIANCE ANALYSIS 104 RECONCILE . A company makes a single product and uses standard absorption costing. The standard cost per unit is as follows: 26 Budgeted production is 14,000 units per month. Last month, actual production was 14,800 units, and actual costs were as follows: Total costs = ___Re. Direct materiais 125,000 Direct labour 92,000 Fixed production overheads 170,000 387,000 ‘ Required ; P Prepare a statement for the month that reconciles budgeted costs, standard costs and actual costs 10.2 SIMPLE VARIANCES (2) Z Company uses a standard costing system and has the following labour cost standard in relation to one of its products: 4 hours of skilled labour at Rs.6.00 per hour: Rs.24.00 During October, 3,350 units of this products were made, which was 150 units less than budgeted. The labour cost incurred was Rs.79,893 and the number of direct labour hours worked was 13,450. ¥ 2 E Required : Calculate the direct labour rate and efficiency variances for the month. () Company J uses a standard costing system and has the following data P relating to one of its products: . Rs. Rs. : per per ; unit__unit Selling price 9.00 : Variable cost 4.00 : Fixed cost 3.00 7.00 t Profit 2.00 The budgeted sales for October Year 5 were 800 units, but the actual sales a , were 850 units. The revenue earned from these sales was Rs. 7,480. - je Weal Iriernabonal 6Cost and management accounting 10.3 10.4 Required Calculate the sales price and sales volume variances for October using: standard absorption costing standard marginal costing, (©) The budget was to produce 15,000 units. The standard fixed production cost of a product is Rs.20, which is 4 hours at a rate of Rs.5 per direct labour hour. ‘Actual production was 14,600 units and actual fixed production overhead expenditure was Rs.325,000. The production output was manufactured in 58,000 hours of work. Required Calculate: the fixed production overhead total cost variance the fixed production overhead expenditure variance and volume variance the fixed production overhead efficiency variance and capacity variance OVERHEAD VARIANCES: ‘A company operates a standard overhead absorption costing system. The standard fixed overhead rate per hour is Rs.25. The following data relate to last month Actual hours worked 8,250 Budgeted hours 9,000 Standard hours of actual production 7,800 Actual fixed overhead expenditure Rs.211,000 Required Calculate for the month: (a) _ the fixed overhead capacity variance (b) _ the fixed overhead efficiency variance (©) _ the fixed overhead expenditure variance. MANUFACTURING COST VARIANCE ‘A manufacturing company uses a standard absorption costing system in accounting for its production costs, The standard cost of a unit of product is as follows: Standard Standard Standard + quantity _price/rate cost Rs. Rs. Direct materials Skilos 6.00 30.00 Direct labour 20 hours. 4.00 80.00 Variable production overhead 20 hours 0.20 4.00 Fixed production overhead 20 hours, 5.00 100.00 ‘© Erle Wea iniemational ro “The Inst of Chartered Accountant of Pakistanpate eee eter ee eee eC ‘Question bank: Objective test and long-orm questions 10.5 ‘@ Emile Wool hematoma’ SSS ‘The following data relates to Period 1 Budgeted output 25,000 units Actual output - produced 20,000 units Units sold 15,000 units Materials put into production 120,000 kilos Materials purchased 200,000 kilos Direct labour hours paid 500,000 hrs Due to a power failure 10,900 hours were lost. Cost of materials purchased and-used Rs.825,000 Rate per direct labour hour Rs5 Variable production overhead Rs.70,000 woud Fixed production overhead Rs.2,100,000 Required Calculate, for Period 1 the material price variance the material usage variance the direct labour rate variance the direct labour idle time variance the direct labour efficiency variance the variable overhead total cost variance the fixed overhead expenditure variance the fixed overhead volume variance the total manufacturing cost variance, Car oaron VARIANCES AND OPERATING STATEMENTS Standard data per unit of Product Q is as follows: Rs.per Rs. per unit —_unit Standard sales price 6.00 Direct labour cost 0.64 Direct material cost 3.00 Variable production overheads 0.16 3.80 Contribution 220 Fixed overheads 0.20 Profit 2.00Cost and management accounting ‘The budgeted production and sales volume for Product Q was 12,000 units. Budget for 2,400 direct labour hours (12,000 units): 2 Sunits to be produced per hour Standard labour cost is Rs.3.20 per hour Standard material cost is Rs.1.50 per kilogram and each unit requires 2 kilos Budgeted fixed overheads Rs.2,400 Budgeted variable overhead cost per direct labour hour = Rs.0.80. oooo ‘Actual results for the same period: 14,500 units were manufactured Q 2,320 direct labour hours were worked, and cost Rs.7,540 Q 25,000 kilos of direct material were purchased (and used) at a cost of Rs.1.48 per kilogram. Other information: Inventory is valued at standard cost of production. Actual variable overheads were Rs.1,750 Actual fixed overheads were Rs.2.462 Q 10,000 units were sold for Rs.62,600. Required Prepare operating statements for the period using: (a) _ standard absorption costing and (b) standard marginal costing To prepare the absorption costing operating statement, you should show the variable overhead expenditure and efficiency variances, and the fixed 6verhead ‘expenditure and volume variances. VOLUME AND EXPENDITURE VARIANCES: A production manager is studying the cost report for the six-month period that has just ended. The production department incurred overhead costs of Rs.680,000 and had under-absorbed overheads of Rs.46,400. The actual direct labour hours worked in the department were 48,000 hours, which was 2,000 hours less than budgeted. Required (@) Calculate the budgeted absorption rate per direct labour hour. (0) Calculate the budgeted overhead expenditure. (c) Calculate the overhead expenditure and overhead volume variances in the period. ‘© Emile Woot Intemational ry “The insite of Chartered Accountant of Pakistanand long-form quostions 10.7 LETTUCE Lettuce makes a product — the vegetable guard. It is the organic alternative to slug pellets and chemical sprays. For the forthcoming period budgeted fixed costs were Rs.6,000 and budgeted production and sales were 1,300 units. A The vegetable guard has the following standard cost: Rs. Selling price 50 Materials 5kg x Rs.4/kg 20 Labour 3hrs = Rs.4/hr 12 Variable overheads 3hrs x Rs.3/hr 9 ‘Actual results for the period were as follows: 4,100 units were made and sold, earning revenue of Rs.57,200. 6,600kg of materials were bought at a cost of Rs.29,700 but only 6,300 kg were used 3,600 hours of labour were paid for at a cost of Rs.14,220. The total cost for variable overheads was Rs.11,700 and fixed costs were Rs.4,000 ‘The company uses marginal costing and values all inventory at standard cost. (a) Produce a statement reconciling actual and budgeted profit using appropriate variances. (15) (b) Assuming now that the company uses absorption costing, recalculate the fixed production overhead variances (6) (0) Discuss possible causes for the labour variances you have calculated. (4) (25) 10.8 MOONGAZER MoonGazer produces a product — the telescope. Actual resutts for the period were: 430 units made and sold, eaming revenue of Rs.47,300 Materials: 1,075 kg were used. 1,200 kg of materials were purchased at a cost of Rs.17,700 G_Direct labour: 1,700 hours were worked at a cost of Rs.14,637 Fixed production overheads expenditure: Rs.2,400. Variable production overheads expenditure: Rs.3,870. The standard cost card for the product is as follows Rs. Direct material 2kg x Rs.18 30 Direct labour 4nrs x Rs.8.50 34 Variable overhead 4hrs x Rs.2.00 8 Fixed production overhead per unit 5 7 © Emile Woot Intemational sai 49 ‘The Institute of Chartered Accountants of PakistanCost and manegement accounting 10.9 ‘The standard unit selling price is Rs.100. The cost card is based on production and sales of 450 units in each period. ‘The company values its inventories at standard cost. Required Produce an operating statement to reconcile budgeted and actual gross profit. (14) BRK BRK operates an absorption costing system and sells three products, B, R and K which are substitutes for each other. The following standard selling price and cost data relate to these three products: Selling price per Product vunit_ Direct material per unit Direct labour per unit B Rs. 14:00 3-00 kg at Rs. 1-80 perkg 0-5 hrs at Rs. 6°50 per hour R Rs. 15:00 1:25 kg at Rs. 3-28 perkg —_(0-8 hrs at Rs. 6-50 per hour K Rs. 18:00 1-94 kg atRs. 2:50 perkg 0-7 hrs at Rs. 6-50 per hour Budgeted fixed production overhead for the last period was Rs. 81,000. This was absorbed on a machine hour basis. The standard machine hours for each product and the budgeted levels of production and sales for each product for the last period are as follows: Product B R K Standard machine hours per unit, OShrs O6hrs OB hrs Budgeted production and sales (units) 10,000 13,000 9,000 ‘Actual volumes and selling prices for the three products in the last period were as follows: Product B R kK ‘Actual selling price per unit Rs. 14-50 Rs. 15:50 Rs. 19:00 ‘Actual production and sales (units) 9,500 13,500 8,500 Required Calculate the following variances for overall sales for the last period: () sales price variance; (i) sales volume proft variance; (10)‘Question bank: Objective test and long-form questions c : 10.10 CARAT ; Carat plc, a premium food manufacturer, is reviewing operations for a three-month , period. The company operates a standard marginal costing system and ‘manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available: Selling price Rs. 12.00 Direct material A25kg at Rs. 1.70 per kg Direct material B 1.5 kg at Rs. 1.20 per kg Direct labour 0.45 hrs at Rs. 6.00 per hour Fixed production overheads for the three-month period were expected to be Rs. 62,500. Actual data for the three-month period was as follows: Sales and production 48,000 units of ZP were produced and sold for Rs. 580,800 X Direct material A 121,951 kg were used at a cost of Rs. 200,000 : Direct material B 67,200 kg were used at a cost of Rs. 84,000 Direct labour Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of Rs. 117,120 Fixed production overheads Rs. 64,000 F Budgeted sales for the three-month period were 50,000 units of Product ZP. Required (2) Calculate the following variances: ())_ sales volume contribution and sales price variances; (ii) price, mix and yield variances for each material; (ii) labour rate, labour efficiency and idle time variances, (15) : (b) Prepare an operating statement that reconciles budgeted gross profit to - actual gross profit with each variance clearly shown. 8 = © Suggest possible explanations for the following variances: - (i) material price, mix and yield variances for material A; (i) labour rate, labour efficiency and idle time variances, (25) (© rile Woot international 5 ‘The insite of Chartered Accountants of PakistanCost and management accounting 10.41 HEXA LIMITED Hexa Limited uses a standard costing system. The following profit statement summarizes the performance of the company for August 20X3: Rupees Budgeted profit 3,500 Favourable variance: | Material price 16,000 Labour efficiency 11,040 27,040 Adverse variance Fixed overheads boon Material usage (16,000) Labour rate - (7,520) | (29,520) Actual profit 1,020 The following information is also available: Standard material price per unit (Rs.) 40 Actual material price per unit (Rs.) 39 [Standardwagerateperhour(Rs) «60 22—~=«* lSadwdvagehomsprom (aa Actual wages (Rs.) 308,480 | Actual fixed overheads (Rs.) 316,000 Fixed overheads absorption rate 100% of direct wages Required Calculate the following from the given data: (a) (b) (c) (a) (e) (b). Budgeted output in units ‘Actual number of units purchased ‘Actual units produced Actual hours worked Actual wage rate per hour (15) State any two possible causes of favorable material price variance, unfavourable material quantity variance, favorable labour efficiency variance and unfavourable labour rate variance. (04) {Eile Woot international a ‘The Inst of Chartared Acsountanis of PakistanCee eee el me eer ema. eee ae ee) a ee ee ee ee re ~~. ‘Question bank: Objective test and fong-form questions 10.12 EXCELLENT LIMITED > Excellent Limited makes and sells a single product. The standard cost card for the product, based on normal capacity of 45,000 units per month is as under: Rupees Material 60 kgs at Rs. 0.60 per kg 36.00 Labour % hour at Rs. 50.00 per hour 25.00 Variable factory overheads, 30% of direct labour cost 7.50 & = Fixed factory overheads 6.50 Ne" en oat ‘Total 75.00 Actual data for the month of August 20X3 is as under: ‘Work in process on August 1, 20X3 (60% converted) Units 10,000) | Started during the month Units 50,000) Transferred to finished goods Units 48,000) Work in process on August 31, 20X3 (50% converted) | Units 10,000 Material purchased at Rs. 0.50 per kg TRs. 1,750.01 Material issued to production - Kas 3,100,000 safgs eP [Direct labour at Rs. 52 per hour Rs. 7,300,000 ‘3°16 Factory overheads (including fixed costs of Rs. 290,000) | Rs. 600,000) ‘The company uses FIFO method for inventory valuations All materials are added at the beginning of the process. Conversion costs are ; incurred evenly throughout the process. Inspection takes place when the units ‘are 80% complete, Under normal conditions, no spoilage should occur. Required (@) Prepare a quantity and equivalent production schedules for material and conversion costs, (b) Calculate material, labour and variable overhead variances. (Assume that the material price variance is calculated as materials are used rather than as they are purchased). ‘33 © (c)_Caloulate the over(under) absorption of fixed production overhead and analyse it into expenditure variance and volume variance. 344) Analyse the fixed production overhead volume variance into efficiency and capacity variances. (20) eo > Cy, ? {© Emile Wea iteration 5 “The atta of Charred Aesountanis of PakistanCost and management accounting 10.13 WATOOL LIMITED You have recently been appointed as the Financial Controller of Watool Limited. Your immediate task is to prepare a presentation on the company’s performance for the recently concluded year. You have noticed that the records related to cost of production have not been maintained properly, However, while scrutinizing the files you have come across certain details prepared by your 4 predecessor which are as follows: (Annual production was 50,000 units which is equal to the designed capacity of the plant (ii) The standard cost per unit of finished product is as follows: Raw material X 6 kg at Rs. 50 per kg Raw material Y 3.kg at Rs. 30 per kg | Labour- skilled _ 1.5 hours at Rs. 150 per hour | Labour- unskilled 2 hours at Rs. 100 per hour Factory overheads __| Variable overheads per hour are Rs. 100 for skilled 3 labour and Rs. 80 for unskilled labour. Fixed - overheads are Rs. 4,000,000. (iii) Data related to variation in cost of materials is as under: Material X price variance Rs, 95,000 (Adverse) Material Y actual price 6% below the standard price . Material X quantity variance | Nil 4 Material Y quantity variance | Rs. 150,000 (Adverse) = (iv) Opening raw material inventories comprised of 25 days of standard consumption whereas closing inventories comprised of 20 days of standard consumption. (¥) Actual labour rate for skilled and unskilled workers was 10% and 5% higher : respectively. (vi) Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled labour hours was 3:4 respectively. (vil) Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed overheads were 6% more than the budgeted amount Required (a) Actual purchases of each type of raw materials. (b) Labour rate and efficiency variances, variable overhead rate and efficiency variances and fixed overhead expenditure variance. (20) < ‘© Emile Woof ntemational s ‘The Instute of Chartered Accountant of Paistan+e tt a = =e es wee Se hlUm CU he : A, 10.14 10.15 sk Objective tast and long-form questions ABC LIMITED ‘ABC Limited produces and markets a single product. The company operates a standard costing system. The standard cost card for the product is as under: Sale price Rs. 600 per unit Direct material 2.5 kg per unit at Rs. 50 per kg Direct labour [2.0 hours per unit at Rs. 100 per hour Variable overheads Rs. 25 per direct labour hour Fixed overheads Rs. 10 per unit Budgeted production —_| 500,000 units per month The company maintains finished goods inventory at 25,000 units throughout the year. Actual results for the month of August 20X3 were as under: - Rupees in ‘000 Sales 480,000 units. 295,000 Direct material 950,000 kgs. 55,000 Direct labour {990,000 hours: 105,000 Variable overheads 26,000 Fixed overheads 5,100 Required Reconcile budgeted profit with actual profit using relevant variances, (18) ‘STANDARD COST SHEET The following data relates to actual output, actual costs and variances for the four- weekly accounting period number 4 of a company which makes only one product. ‘The value of work-in-progress at the end of period 4 was the same as the value of work-in-progress at the beginning of the month. Actual production of Product XY 18,000 units Actual costs incurred: Rs,000 Direct materials purchased and used (150,000 kg) 210 Direct labour costs (32,000 hours) 136 Variable production overhead 38 Variances: ee Direct materials price 15. Favourable Direct materials usage 9 Adverse Direct labour rate 8 Adverse Direct labour efficiency 16 Favourable Variable production overhead expenditure 6 Adverse Variable production overhead efficiency 4 Favourable Variable production overhead varies with labour hours worked. ‘standard marginal costing system is operated. Required Present a standard product cost sheet for one unit of Product XY, showing how the standard marginal production cost of the product is made up. ‘Erle Woolf inimational Eo ‘The Ieiute af Chartered Accountants of Palatan