PM – Nov 2015 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material, labour, and variable overhead variances, and discuss causes for variances in KOMERE Limited’s cost system.

Question

KOMERE Limited operates a Standard Costing System. Below are the standard and actual costs for October 2015:

Standard Cost Information:

Direct Material:

A: 20 kg at N100 per kg = N2,000
B: 30 kg at N80 per kg = N2,400

Direct Labour:

Skilled: 10 hours at N40 per hour = N400
Unskilled: 10 hours at N25 per hour = N400

Variable Overhead Cost:

10 hours at N20 per hour = N200

Total Standard Cost per unit = N5,250

Actual Results:

Direct Material:
- Material A: 105,000 kg purchased at N10,290,000; 99,000 kg consumed
- Material B: 148,000 kg purchased at N11,988,000; 144,000 kg consumed
Direct Labour:
- Skilled Labour: 56,000 hours at N2,352,000
- Unskilled Labour: 56,000 hours at N1,344,000
Variable Overhead: N1,064,000
Actual Production: 4,800 units

Required:

(a) Calculate all the relevant variances. (8 Marks)

(b) What are possible causes of the variances computed? (7 Marks)

Answer

a) i) Material Price Variance
= AQP (SP – AP)
A 105,000(100 – 10,290,000/105,000) = ₦210,000 (F)
B 148,000(80 – 11,988,000/148,000) = ₦148,000 (A)
ii) Material Usage Variance:
= SP(SQ – AQ used)
A 100[(4,800 × 20kg) – 99,000] = ₦300,000 (A)
B 80[(4,800 × 30kg) – 144,000] = ₦0

iii) Material Mix Variance

iv) Material Yield Variance

v) Labour Rate Variance = AH (SR – AR)
Skilled 56,000(₦40 – ₦2,352,000/56,000) = ₦112,000(A)
Unskilled 56,000(₦25 – ₦1,344,000/56,000) = ₦56,000(F)

vi) Labour Efficiency Variance
= SR(SH – AH)
Skilled ₦40[(4,800 × 10hrs) – 56,000] = ₦320,000(A)
Unskilled ₦25[(4,800 × 10hrs) – 56,000] = ₦200,000(A)

vii) Labour Mix Variance

viii) Labour Yield Variance

xi) Variable Overhead Expenditure Variance
= AH (SR – AR)
= 56,000(₦20 – ₦1,064,000/56,000) = ₦56,000(F)

x) Variable Overhead Efficiency Variance
= SR (SH – AH)
= ₦20[(4,800 × 10hrs) – 56,000] = ₦160,000(A)

(b) Possible Causes of the Variances:

Material Price Variance:
- Material A (Favorable): Likely due to efficient negotiation or purchasing a lower-grade material.
- Material B (Adverse): Likely due to unexpected increases in market prices or inaccurate budget standards.
Material Usage Variance:
- Material A (Adverse): Possibly caused by inferior material quality or inexperienced operatives leading to excess usage.
- Material B (Favorable): Effective material utilization or careful handling.
Labour Rate Variance:
- Skilled Labour (Adverse): Likely due to employing higher-paid skilled workers or unexpected wage rate increases.
- Unskilled Labour (Favorable): Possibly due to hiring at lower wage rates or efficient negotiation.
Labour Efficiency Variance:
- Skilled and Unskilled Labour (Adverse): Poor quality raw materials, high rework rates, machine issues, power outages, or inadequate supervision.
Variable Overhead Variance:
- Expenditure (Favorable): Savings from efficient overhead cost control.
- Efficiency (Adverse): Overuse of hours possibly due to low efficiency in production operations.