Question

QUESTION -VARIANCES 3 G'Day Limited manufactures one product, and the entire product is sold as soon as it is produced. There are no opening or closing stocks and work in progress is negligible. The company operates a standard costing system and analysis of variances is made every month. The standard cost card for the product, a boomerang, is as follows: Direct materials Direct wages Variable overheads Fixed overhead Standard cost Standard profit Standard selling price 0.5 kilos at €40.00 per kilo 2 hours at €20.00 per hour 2 hours at €3.00 per hour 2 hours at €37.00 per hour 20.00 40.00 6.00 74.00 140.00 60.00 200.00 Selling and administration expenses are not included in the standard cost, and are deducted from profit as a period charge. Budgeted output and sales for the month of June 2xx5 was 5,100 units. Actual results for June 2xX5 were as follows; Production of 4,850 units was sold for €956,000; Materials consumed in production amounted to 2,300 kilos at a total cost of €98,000; Labour hours paid for amounted to 8,500 hours at a cost of €168,000; Actual operating hours amounted to 8000 hours; Variable overheads amounted to €26,000; Fixed overheads amounted to €423,000; Selling and administration expenses amounted to €180,000. You are required to: (a) calculate all variances; (b) prepare an operating statement for the month ended 30 June 2xx5.

Answer 1

A)

. Material Cost Variance = Standard material cost required for actual output - actual cost incurred

= Standard price X standard quantity required - actual price X actual quantity

= £40.00 per kilo X(4850units X 0.5 kilo per unit) - £98000

  = £97000 - £98000

= £1,000 (A)

i) Material Price variance = (SP-AP) X AQ

= (£40.0 - £98000/2300 kilos) X 2300 kilos

= (£40.00 - £42.61 ) X 2300 kilos

= £ 6,003 (A)

ii) Material usage variance = ( SQ - AQ) X SP

=((4850 units X 0.5 kilos per unit) - 2300 kilos) X £40.00 per kilo

=£5,000(F)

2. Labor cost variance = standard labour cost required for actual output - Actual cost incurred

= standard hours required for actual output X standard rate -actual hours worked X actual rate

=(SH X SR)-(AH X AR)

= ( 4850 units X 2 hours per unit X £20.00 per hour ) - £1,68,000

= £ 194000 - £168000

= £26000 (F)

i) Labour rate variance = ( SR -AR) X AH

= ( £20.00 - (£168000/8500hours) ) X 8500 hours

= ( £20.00 - £19.76) X 8500 hours

= £ 2040 (F)

ii) Labour efficiency variance = (SH -AH) X SR

=(( 4850 units X 2 hours per unit) - 8500 hours ) X £20.00

= £24000 (F)

3. Variable overhead cost variance = ( Actual output X SRR per unit*) - Actual overheads

*SRR per unit = Budgeted OH/ Budgeted output

= 2 hours X £3.00 per hour X 5100 units / 5100 units

SRR per unit=£6.00 per unit

Variable OH variance = ( 4850 units X £6.00 per unit) - £26000

variable OH variance = £3100 (F)

4. Fixed OH cost variance = ( Actual output X SRR per unit**)-Actual OH

SRR per unit**= 2 hours per unit X £ 37.00 per hour

= £ 74.00 per unit

Fixed OH cost variance = ( 4850 units X £ 74.00 per unit) - £423000

= £64100 (A)

5. Sales variance = Budgeted sales - actual sales

=(Budgeted quantity X std. selling price)- ( Actual quantity sold X Actual selling price)

= ( 5100 units X £200.00 ) - £956000

= £64000(A)

B)   

Computation of COGS
		Particulars	Amount (£)
Direct Material	98000
Add:-Direct Labour	168000
Add:-variable OH	26000
Add:- Fixed OH	423000
Cost of goods sold(A)	715000
Add:- Selling and admin. Exp.	180000
Cost of sales(B)	895000

Operating statement
		Particulars	Amount (£)
Total sales	956000
less:- Cost of goods sold	-715000
Gross Profit	241000
less:-selling and admin exp.	-180000
Net Profit	61000