Question

Question 1 (40 marks)

Magnate Ltd is a manufacturing company which produces a fixed budget for planning purposes. Set out below is the monthly fixed budget of production costs, together with the actual results observed for the month of November 2019.

	Budget	Actual
Units produced	5,000	5,500
	£	£
Cost
Direct material	20,000	22,764
Direct labour	60,000	75,900
Variable Production overhead	14,000	14,950
Fixed Production overhead	10,000	9,000
Depreciation	4,000	4,000

In preparing the flexed budget, the following standards were adopted:

Direct material                       10 kg of materials per unit produced Direct labour    2 hours per unit produced

Variable overheads               Allocated on the basis of direct labour hours

The following additional information is available concerning the actual output:

1. The actual usage of materials in November was 54,200 kg: and
2. The wage rate increased to £6.60 per hour at the start of November.

Required:

1. Show in tabular form the original budget, and the flexed and actual budget with variances in respect of the production costs for the month of November 2019.

(12 marks)

2. Calculate all relevant cost variances in as much detail as possible.

(24 marks)

3. Suggest possible reasons for variances in the question (b). Why management may wish to investigate these variances.

(4 marks) (Question 1 total: 40 marks)

Question 1 (40 marks)

Magnate Ltd is a manufacturing company which produces a fixed budget for planning purposes. Set out below is the monthly fixed budget of production costs, together with the actual results observed for the month of November 2019.

	Budget	Actual
Units produced	5,000	5,500
	£	£
Cost
Direct material	20,000	22,764
Direct labour	60,000	75,900
Variable Production overhead	14,000	14,950
Fixed Production overhead	10,000	9,000
Depreciation	4,000	4,000

In preparing the flexed budget, the following standards were adopted:

Direct material                       10 kg of materials per unit produced Direct labour    2 hours per unit produced

Variable overheads               Allocated on the basis of direct labour hours

The following additional information is available concerning the actual output:

1. The actual usage of materials in November was 54,200 kg: and
2. The wage rate increased to £6.60 per hour at the start of November.

Required:

1. Show in tabular form the original budget, and the flexed and actual budget with variances in respect of the production costs for the month of November 2019.

(12 marks)

2. Calculate all relevant cost variances in as much detail as possible.

(24 marks)

3. Suggest possible reasons for variances in the question (b). Why management may wish to investigate these variances.

(4 marks) (Question 1 total: 40 marks)

Answer 1

Ans.(a).

Original, Flexed and Actual

	Original	Flexed	Actual
Units Produced	5,000	5,500	5,500
	£	£	£
Cost
Direct Material	20,000	22,000	22,764
Direct Labour	60,000	66,000	75,900
Variable Production Overhead	14,000	15,400	14,950
Fixed Production Overheads	10,000	10,000	9,000
Depreciation	4,000	4,000	4,000

Ans.(b). Material Cost Variance = 764 (A)

Material Price Variance = (0.4 - 0.42) x 54,200 = 1,084 (A)

Material Usage Variance = (55,000 - 54,200) x 0.40 = 320 (F)

Labour Cost Variance = 9,900 (A)

Labour Rate Variance = (6 - 6.6) x 11,500 = 6,900 (A)

Labour Efficiency Variance = (11,000 - 11,500) x 6 = 3,000 (A)

Variable Overhead Cost Variance = 450 (F)

Variable Overhead Rate Variance = (1.4 - 1.3) x 11,500 = 1,150 (F)

Variable Overhead Efficiency Variance = (11,000 - 11,500) x 1.4 = 700 (A)

Fixed Overhead Cost Variance = (2 x 5,500) - 9,000 = 2,000 (F)

Fixed Overhead Expenditure Variance = (10,000 x 1) - 9,000 = 1,000 (F)

Fixed Overhead Volume Variance = (5,500 - 5,000) x 2 = 1,000 (F)