Question Tag: Variance Analysis

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  • 5 Marks

MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

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  • 10 Marks

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

Budget Actual
Output (production and sales) 10,000 9,000
GH¢ GH¢
Sales Revenue 175,000 162,000
Raw Materials (80,000) (100,000 meters) (64,380) (74,000 meters)
Labour (35,000) (5,000 hours) (30,960) (4,300 hours)
Fixed Overheads (35,000) (36,225)
Operating Profit 25,000 30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

  • Sales (price, volume)
  • Material (price and usage)
  • Labour (rate and efficiency)

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  • 6 Marks

ICMA – Nov 2024 – L1 – Q3c – Material and Labour Variances

Calculates material and labour variances based on given actual and standard cost data.

Material and Labour Variances
The data below relates to Agbamame Enterprise for its flagship product, “Herb of Life”:

Standard Cost Card – Per Unit of Herb of Life

Description Cost (GH¢)
Direct materials 5 kg at GH¢4 per kg = GH¢20
Direct labour 4 hours at GH¢15 per DLH = GH¢60
Variable overhead 4 hours at GH¢20 per DLH = GH¢80
Fixed overhead GH¢50 per unit

Budgeted production: 600 units
Actual sales and production: 550 units

Actual cost of:

Actual Costs Cost (GH¢)
Labour (1650 hours) 16,500
Materials (1650 kg) 5,775
Fixed overhead 15,000
Variable overhead 13,275

Data shows that 5% of labour hours paid for was idle, and 10% of materials bought was in stock at the end of the period.

Required:
i) Calculate the material variances.
ii) Calculate the labour variances.

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  • 15 Marks

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

GOODLAND Limited produces and sells a single product. The company adopts a standard absorption costing system and absorbs overheads on the basis of direct labour hours. Presented below are the standard cost details and selling price for a single unit of the product:

It has been estimated that the production and sales for the month would be 2,000 units. However, the estimated production for the month has been used as a basis for determining the fixed overhead absorption rate.

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

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  • 20 Marks

PM – Nov 2014 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate various cost and sales variances, including an operating statement for Ibek Limited.

Ibek Limited manufactures a standard product and operates a system of variance accounting using a fixed budget.

As a newly appointed Management Accountant, you are responsible for preparing the monthly operating statements.

Extracts from the budget for the standard product cost and actual data for the month ended 31 December 2013 are given below:

Budgeted and Standard Cost Data:

  • Budgeted sales and production for the month: 20,000 units
  • Standard cost for each unit of product:
Item Details
Direct materials: A: 10 kg at N2 per kg
B: 5 kg at N10 per kg
Direct wages 5 hours at N6 per hour
Fixed overhead Absorbed at 200% of direct wages
  • Budgeted sales price has been calculated to give a margin of 20% of sales price.

Actual Data for the Month Ended 31 December 2013:

  • Production: 19,000 units sold at a price of 15% higher than that budgeted
  • Direct materials consumed:
Item Quantity Cost per kg
Material A 192,000 kg N2.40
Material B 96,000 kg N9.40
  • Direct wages incurred: 92,000 hours at N6.40 per hour
  • Fixed production overhead incurred: N580,000

Required:

(a) Prepare the operating statement for the month ended 31 December 2013. (3 Marks)

(b) Calculate the following variances: i. Direct material cost variance (5 Marks)
ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)

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  • 20 Marks

PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:

The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

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  • 20 Marks

PM – May 2024 – L2 – SB – Q3 – Budgeting and Budgetary Control

Evaluation of budgeting systems and identification of behavioral issues with variance reporting in a recently acquired company.

Ogbunigwe Nigeria Limited is a big and reputable publishing firm established in the early 1970’s. The company has recently been taken over by Wisdom International Publishing Company (WIPC) – a multinational company operating in several countries of the world.

Mr. Pampam, who is the Managing Director of WIPC, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Ogbunigwe Nigeria Limited.

During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the newly acquired company submitted the last budget statement for the notebook production department, which covered Quarter 3 of 2022, as shown below:

Budget statement for Quarter 3
Department: Notebook Production

Particulars Actual Results (N’000) Budget (N’000) Variances (N’000)
Direct materials 1,512 1,440 (72)
Direct labor 738 720 (18)
Variable production overhead 474 432 (42)
Fixed production overhead 354 336 (18)
Variable administrative overhead 246 240 (6)
Fixed administrative overhead 300 288 (12)
Total costs 3,624 3,456 (168)
Sales value of production 4,650 4,464 186
Profit 1,026 1,008 18

The Head of Department of the notebook production department, Mr. Josiah Okoli, commented on the state of affairs of the department. He revealed that the budget statement presented was based on 72,000 units with a standard labor processing time of 2.85 hours per unit.

Mr. Pampam observed that Mr. Josiah Okoli was not enthusiastic about the budget system. He viewed it as a pressure system imposed by the company to portray some departmental managers in a bad light. He pointed out that the system was hurriedly introduced by Dynamic Financial Konsult about twelve months ago. The consultant did not provide sufficient explanation to assist users of the budget to understand the system. Mr. Josiah Okoli expressed doubt about the competence of the consultant and believed the system was not suitable for Ogbunigwe Nigeria Limited. He even stated that his department might have actually made a loss, as against the reported profit.

This situation cuts across many departments, making it imperative and urgent to resolve the issues with the budget system. Your advice to Mr. Pampam will assist tremendously in addressing these problems.

Required:
a. Redraft the budget statement in a more informative manner, showing the relevant variances. (12 Marks)
b. State the general behavioral problems associated with budgeting, and relate these issues to this situation. (4 Marks)
c. Recommend ways to make the budgeting system more useful and acceptable in the current situation. (4 Marks)

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  • 20 Marks

PM – May 2024 – L2 – SB – Q2 – Costing Systems and Techniques

The impact of lean manufacturing on variance analysis and the transition from traditional costing to lean accounting.

Kenny Katuma (KK) manufactures standard engine components. It operates a costing system based on absorption costing and standard costs, and the management control system is based on monthly variance analysis reports.
KK has recently appointed a new CEO, who has begun to introduce changes to the manufacturing systems. He believes in lean manufacturing principles and has begun to establish a just-in-time manufacturing system, with a focus on reducing inventories and production cycle times, and eliminating waste. Discussions are in progress with major suppliers to introduce just-in-time purchasing arrangements.
The CEO has informed the management accountant that changes will be needed to the company’s internal accounting systems. He has also indicated that KK will need a lean management accounting system to support its lean manufacturing system. The CEO is dissatisfied with many features of the current management accounting system. There are many errors in data capture for the cost accounting system, and monthly variance reports are not produced until two weeks after the end of each month. He also considers that wrong information is being reported.

Required:
a. Explain the main principles of a lean information system. (6 Marks)
b. Discuss the reasons why KK’s current cost and management accounting systems do not fulfill the requirements of lean information systems. (7 Marks)
c. Identify the changes that should be made to KK’s management accounting system in order to turn it into a lean information system. (7 Marks)

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  • 12 Marks

MI – Nov 2020 – L1 – SB – Q4b – Basic Variance Analysis

Calculate material and labour variances for product AB, and list possible causes of each variance.

b. ABC maintains the following standard cost card for product AB:

Item Standard Quantity Standard Price Total Cost (N)
Direct Material A 3kg @ N8 per kg N24
Direct Material B 5kg @ N6 per kg N30
Direct Labour 2hrs @ N24 per hr N48
Variable Overhead 2hrs @ N9 per hr N18
Total Standard Cost N120

Actual Results for the Period:

  • Actual production: 11,800 units
  • Direct material A: 35,800kg @ N7.5 per kg = N268,500
  • Direct material B: 62,000kg @ N7 per kg = N434,000
  • Direct labour: 24,500 hours @ N25 per hour = N612,500
  • Variable overhead: 24,500 hours @ N9 per hour = N220,500

Required:
i. Calculate the following variances:

  • Material price
  • Material usage
  • Total material
  • Labour rate
    (9 Marks)

ii. List TWO possible causes of each of the variances in (i) above. (3 Marks)

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  • 15 Marks

PM – May 2022 – L2 – SA – Q6 – Budgeting and Budgetary Control

Preparation of flexible budgets for varying production levels and analysis of variances.

Ezenwa Nigeria Limited is a company which produces a single product on an assembly line. The budget personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period.

Costs Production of 80,000 units Production of 160,000 units
Direct materials 3,200,000 6,400,000
Indirect materials 480,000 800,000
Direct labour 2,000,000 4,000,000
Power 720,000 960,000
Repairs 800,000 1,200,000
Supervision 800,000 1,440,000
Rent, insurance and rates 360,000 360,000

Additional Information:
Supervision is a “step function”. To this end, one supervisor is employed for all production levels up to and including 100,000 units. For higher levels of production, an assistant supervisor whose remuneration is N640,000 will be added.

Required:
a. Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months:
i. 80,000 Units
ii. 100,000 Units
iii. 120,000 Units
iv. 140,000 Units
v. 160,000 Units (9 Marks)

b. During the three months July to September 2021, 100,000 units were produced. Actual costs incurred during this period were as follows:

Costs Amount (N)
Direct materials 4,150,000
Indirect materials 580,000
Direct labour 2,700,000
Power 760,000
Repairs 885,000
Supervision 850,000
Rent, insurance and rates 320,000

Required:
i. Prepare a budget report for presentation to the Production Director displaying all relevant variances. (3 Marks)
ii. For each variance, suggest any further investigations which might be required and the necessary actions required to be taken by the Director. (3 Marks)

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  • 5 Marks

MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

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  • 10 Marks

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

Budget Actual
Output (production and sales) 10,000 9,000
GH¢ GH¢
Sales Revenue 175,000 162,000
Raw Materials (80,000) (100,000 meters) (64,380) (74,000 meters)
Labour (35,000) (5,000 hours) (30,960) (4,300 hours)
Fixed Overheads (35,000) (36,225)
Operating Profit 25,000 30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

  • Sales (price, volume)
  • Material (price and usage)
  • Labour (rate and efficiency)

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  • 6 Marks

ICMA – Nov 2024 – L1 – Q3c – Material and Labour Variances

Calculates material and labour variances based on given actual and standard cost data.

Material and Labour Variances
The data below relates to Agbamame Enterprise for its flagship product, “Herb of Life”:

Standard Cost Card – Per Unit of Herb of Life

Description Cost (GH¢)
Direct materials 5 kg at GH¢4 per kg = GH¢20
Direct labour 4 hours at GH¢15 per DLH = GH¢60
Variable overhead 4 hours at GH¢20 per DLH = GH¢80
Fixed overhead GH¢50 per unit

Budgeted production: 600 units
Actual sales and production: 550 units

Actual cost of:

Actual Costs Cost (GH¢)
Labour (1650 hours) 16,500
Materials (1650 kg) 5,775
Fixed overhead 15,000
Variable overhead 13,275

Data shows that 5% of labour hours paid for was idle, and 10% of materials bought was in stock at the end of the period.

Required:
i) Calculate the material variances.
ii) Calculate the labour variances.

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  • 15 Marks

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

GOODLAND Limited produces and sells a single product. The company adopts a standard absorption costing system and absorbs overheads on the basis of direct labour hours. Presented below are the standard cost details and selling price for a single unit of the product:

It has been estimated that the production and sales for the month would be 2,000 units. However, the estimated production for the month has been used as a basis for determining the fixed overhead absorption rate.

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

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  • 20 Marks

PM – Nov 2014 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate various cost and sales variances, including an operating statement for Ibek Limited.

Ibek Limited manufactures a standard product and operates a system of variance accounting using a fixed budget.

As a newly appointed Management Accountant, you are responsible for preparing the monthly operating statements.

Extracts from the budget for the standard product cost and actual data for the month ended 31 December 2013 are given below:

Budgeted and Standard Cost Data:

  • Budgeted sales and production for the month: 20,000 units
  • Standard cost for each unit of product:
Item Details
Direct materials: A: 10 kg at N2 per kg
B: 5 kg at N10 per kg
Direct wages 5 hours at N6 per hour
Fixed overhead Absorbed at 200% of direct wages
  • Budgeted sales price has been calculated to give a margin of 20% of sales price.

Actual Data for the Month Ended 31 December 2013:

  • Production: 19,000 units sold at a price of 15% higher than that budgeted
  • Direct materials consumed:
Item Quantity Cost per kg
Material A 192,000 kg N2.40
Material B 96,000 kg N9.40
  • Direct wages incurred: 92,000 hours at N6.40 per hour
  • Fixed production overhead incurred: N580,000

Required:

(a) Prepare the operating statement for the month ended 31 December 2013. (3 Marks)

(b) Calculate the following variances: i. Direct material cost variance (5 Marks)
ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)

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  • 20 Marks

PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:

The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

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  • 20 Marks

PM – May 2024 – L2 – SB – Q3 – Budgeting and Budgetary Control

Evaluation of budgeting systems and identification of behavioral issues with variance reporting in a recently acquired company.

Ogbunigwe Nigeria Limited is a big and reputable publishing firm established in the early 1970’s. The company has recently been taken over by Wisdom International Publishing Company (WIPC) – a multinational company operating in several countries of the world.

Mr. Pampam, who is the Managing Director of WIPC, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Ogbunigwe Nigeria Limited.

During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the newly acquired company submitted the last budget statement for the notebook production department, which covered Quarter 3 of 2022, as shown below:

Budget statement for Quarter 3
Department: Notebook Production

Particulars Actual Results (N’000) Budget (N’000) Variances (N’000)
Direct materials 1,512 1,440 (72)
Direct labor 738 720 (18)
Variable production overhead 474 432 (42)
Fixed production overhead 354 336 (18)
Variable administrative overhead 246 240 (6)
Fixed administrative overhead 300 288 (12)
Total costs 3,624 3,456 (168)
Sales value of production 4,650 4,464 186
Profit 1,026 1,008 18

The Head of Department of the notebook production department, Mr. Josiah Okoli, commented on the state of affairs of the department. He revealed that the budget statement presented was based on 72,000 units with a standard labor processing time of 2.85 hours per unit.

Mr. Pampam observed that Mr. Josiah Okoli was not enthusiastic about the budget system. He viewed it as a pressure system imposed by the company to portray some departmental managers in a bad light. He pointed out that the system was hurriedly introduced by Dynamic Financial Konsult about twelve months ago. The consultant did not provide sufficient explanation to assist users of the budget to understand the system. Mr. Josiah Okoli expressed doubt about the competence of the consultant and believed the system was not suitable for Ogbunigwe Nigeria Limited. He even stated that his department might have actually made a loss, as against the reported profit.

This situation cuts across many departments, making it imperative and urgent to resolve the issues with the budget system. Your advice to Mr. Pampam will assist tremendously in addressing these problems.

Required:
a. Redraft the budget statement in a more informative manner, showing the relevant variances. (12 Marks)
b. State the general behavioral problems associated with budgeting, and relate these issues to this situation. (4 Marks)
c. Recommend ways to make the budgeting system more useful and acceptable in the current situation. (4 Marks)

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  • 20 Marks

PM – May 2024 – L2 – SB – Q2 – Costing Systems and Techniques

The impact of lean manufacturing on variance analysis and the transition from traditional costing to lean accounting.

Kenny Katuma (KK) manufactures standard engine components. It operates a costing system based on absorption costing and standard costs, and the management control system is based on monthly variance analysis reports.
KK has recently appointed a new CEO, who has begun to introduce changes to the manufacturing systems. He believes in lean manufacturing principles and has begun to establish a just-in-time manufacturing system, with a focus on reducing inventories and production cycle times, and eliminating waste. Discussions are in progress with major suppliers to introduce just-in-time purchasing arrangements.
The CEO has informed the management accountant that changes will be needed to the company’s internal accounting systems. He has also indicated that KK will need a lean management accounting system to support its lean manufacturing system. The CEO is dissatisfied with many features of the current management accounting system. There are many errors in data capture for the cost accounting system, and monthly variance reports are not produced until two weeks after the end of each month. He also considers that wrong information is being reported.

Required:
a. Explain the main principles of a lean information system. (6 Marks)
b. Discuss the reasons why KK’s current cost and management accounting systems do not fulfill the requirements of lean information systems. (7 Marks)
c. Identify the changes that should be made to KK’s management accounting system in order to turn it into a lean information system. (7 Marks)

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  • 12 Marks

MI – Nov 2020 – L1 – SB – Q4b – Basic Variance Analysis

Calculate material and labour variances for product AB, and list possible causes of each variance.

b. ABC maintains the following standard cost card for product AB:

Item Standard Quantity Standard Price Total Cost (N)
Direct Material A 3kg @ N8 per kg N24
Direct Material B 5kg @ N6 per kg N30
Direct Labour 2hrs @ N24 per hr N48
Variable Overhead 2hrs @ N9 per hr N18
Total Standard Cost N120

Actual Results for the Period:

  • Actual production: 11,800 units
  • Direct material A: 35,800kg @ N7.5 per kg = N268,500
  • Direct material B: 62,000kg @ N7 per kg = N434,000
  • Direct labour: 24,500 hours @ N25 per hour = N612,500
  • Variable overhead: 24,500 hours @ N9 per hour = N220,500

Required:
i. Calculate the following variances:

  • Material price
  • Material usage
  • Total material
  • Labour rate
    (9 Marks)

ii. List TWO possible causes of each of the variances in (i) above. (3 Marks)

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  • 15 Marks

PM – May 2022 – L2 – SA – Q6 – Budgeting and Budgetary Control

Preparation of flexible budgets for varying production levels and analysis of variances.

Ezenwa Nigeria Limited is a company which produces a single product on an assembly line. The budget personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period.

Costs Production of 80,000 units Production of 160,000 units
Direct materials 3,200,000 6,400,000
Indirect materials 480,000 800,000
Direct labour 2,000,000 4,000,000
Power 720,000 960,000
Repairs 800,000 1,200,000
Supervision 800,000 1,440,000
Rent, insurance and rates 360,000 360,000

Additional Information:
Supervision is a “step function”. To this end, one supervisor is employed for all production levels up to and including 100,000 units. For higher levels of production, an assistant supervisor whose remuneration is N640,000 will be added.

Required:
a. Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months:
i. 80,000 Units
ii. 100,000 Units
iii. 120,000 Units
iv. 140,000 Units
v. 160,000 Units (9 Marks)

b. During the three months July to September 2021, 100,000 units were produced. Actual costs incurred during this period were as follows:

Costs Amount (N)
Direct materials 4,150,000
Indirect materials 580,000
Direct labour 2,700,000
Power 760,000
Repairs 885,000
Supervision 850,000
Rent, insurance and rates 320,000

Required:
i. Prepare a budget report for presentation to the Production Director displaying all relevant variances. (3 Marks)
ii. For each variance, suggest any further investigations which might be required and the necessary actions required to be taken by the Director. (3 Marks)

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