PM – NOV 2016 – L2 – Q5 – Standard Costing and Variance Analysis

Question tests calculation and interpretation of material price, usage, mix and yield variances for a petroleum additive manufacturer.

Question

Okeke and Sons produces a new petroleum additive called ‘EPBC’ used in increasing petrol engine efficiency, while at the same time reducing its fuel consumption. The actual and budgeted quantities in litres of materials required to produce ‘EPBC’ and the budgeted prices of materials in October 2016 are as follows:

You are required to:

a. Calculate the individual chemical and total direct materials price and usage variances for October 2016. (4 Marks)

b. Calculate the individual chemical and total direct materials yield and mix variances for October 2016. (4 Marks)

c. What conclusions would you draw from the various variances calculated in (a) and (b) above? (4 Marks)

d. State ONE possible cause of each of the variances computed in (a) and (b) above. (3 Marks)

Answer

i. Material Price Variance

ii. Material Usage Variance

Note
It is assumed that the budgeted output is same as actual output.

b) Material Mix Variance
i) Standard Mix of materials

(ii) Standard mix of actual quantity

(iii) Material mix variance

(iv) Material Yield Variance

c. Conclusions:
The results of the variances calculated reveal the efficiency and cost control over materials used for production. For instance:

Price variances indicate if purchasing was more or less favorable than expected.
Usage variances highlight wastage or savings in material consumption.
Mix and yield variances provide insights into the proportion of materials used and how it affected the overall output.

d. Possible Causes of Variances:

Price Variance: A possible cause could be changes in market prices for raw materials.
Usage Variance: Poor production planning or inefficient use of materials may result in higher usage than expected.
Mix Variance: Variance in material proportions could arise from changes in supplier quality or stock availability.
Yield Variance: Inefficiencies in the production process or equipment failures could lead to a lower yield than expected.

Tags: Cost Variances, Material variances, mix variance, Price Variance, Usage Variance, yield variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2016

Uploader: Kwame Aikins