- 15 Marks
MA – L2 – Q19 – Standard Costing and Variance Analysis
Question
Zaytuna Enterprises operates a standard absorption costing system to control the manufacturing costs of its single product, “Eco Blocks”. The following standards have been set:
| Description | Standard |
|---|---|
| Direct material | 2 kgs at GH₵6/kg |
| Direct labour | 1 hr at GH₵7/hr |
| Fixed overheads | GH₵9 |
| Total production cost | GH₵28 |
The fixed overhead standard cost per unit is based on a budgeted monthly production of 4,000 units.
Actual results for the most recent month were:
| Description | Actual |
|---|---|
| Production | 4,300 units |
| Direct material cost | GH₵56,000 for 9,000 kgs |
| Direct labour cost | GH₵32,800 for 4,600 hours paid, only 4,000 hours were worked |
| Fixed overhead | GH₵35,000 |
No direct material inventories are held.
Required
Calculate the following variances:
(a) Direct material price
(b) Direct material usage
(c) Direct labour rate
(d) Direct labour efficiency
(e) Idle time
(f) Fixed overhead expenditure
(g) Fixed overhead volume
(h) Fixed overhead capacity
Answer
(a) Direct Material Price Variance
= (Standard Price − Actual Price) × Actual Quantity
= (GH¢6 − GH¢6.2222) × 9,000 kg
= GH¢2,000 (A)
(b) Direct Material Usage Variance
= (Standard Quantity − Actual Quantity) × Standard Price
= (8,600 kg − 9,000 kg) × GH¢6
= GH¢2,400 (A)
(c) Direct Labour Rate Variance
= (Standard Rate − Actual Rate) × Actual Hours Paid
= (GH¢7 − GH¢7.1304) × 4,600 hours
= GH¢600 (A)
(d) Direct Labour Efficiency Variance
= (Standard Hours − Actual Hours Worked) × Standard Rate
= (4,300 hours − 4,000 hours) × GH¢7
= GH¢2,100 (F)
(e) Idle Time Variance
= Idle Hours × Standard Rate
= (4,600 hours − 4,000 hours) × GH¢7
= GH¢4,200 (A)
(f) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overhead − Actual Fixed Overhead
= (4,000 units × GH¢9) − GH¢35,000
= GH¢36,000 − GH¢35,000
= GH¢1,000 (F)
(g) Fixed Overhead Volume Variance
= (Budgeted Production − Actual Production) × Standard Fixed Overhead Rate
= (4,000 units − 4,300 units) × GH¢9
= GH¢2,700 (F)
(h) Fixed Overhead Capacity Variance
= (Budgeted Hours − Actual Hours) × Fixed Overhead Absorption Rate
= (4,000 hours − 4,000 hours) × GH¢9
= NIL
Working Notes
- Computation of Standard Quantity
Actual Quantity × Material per unit
4,300 × 2 kg = 8,600 kg - Computation of Actual Price
Direct Material Cost / Total Units of material
GH¢56,000 / 9,000 kgs = GH¢6.2222 - Computation of Actual Rate
Direct Labour Cost / Actual Hours Paid
GH¢32,800 / 4,600 hours = GH¢7.1304 - Computation of Standard Hours
Total Production units × Std Hour per unit
4,300 units × 1 hour = 4,300 - Computation of Budgeted Fixed Overhead
Budgeted Monthly Production × Fixed Overhead Cost per unit
4,000 units × GH¢9 = GH¢36,000
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