- 20 Marks
Question
Toma Paste Nigeria Limited produces tomato paste which serves as an alternative for an immediate stew for working mothers instead of using fresh tomatoes. For the forthcoming period, the company’s budgeted fixed costs were ₦600,000 and budgeted production and sales were 13,000 units.
The product has the following standard cost:
| Description | Cost (N) |
|---|---|
| Selling price | 500 |
| Materials: 5kg @ ₦40/kg | 200 |
| Labour: 3hrs @ ₦40/hr | 120 |
| Variable overheads: 3hrs @ ₦30/hr | 90 |
Actual results for the period were:
- 11,000 units were made and sold, earning revenue of ₦5,720,000.
- 66,000 kg of materials were bought at a cost of ₦2,970,000, but only 63,000 kg were used.
- 36,000 hours of labour were paid for at a cost of ₦1,422,000.
- The total cost for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.
The company uses marginal costing and values all inventory at standard cost.
Required:
a. Prepare a statement reconciling actual and budgeted profit using appropriate variances. (12 Marks)
b. Recalculate the fixed production overhead variances, assuming the company uses absorption costing. (4 Marks)
c. Discuss possible causes for the labour variances you have calculated. (4 Marks)
Answer
(a) Reconciliation Statement between Budgeted and Actual Profit
Workings
TOMA PASTE NIGERIA LIMITED
Materials price variance: based on quantities purchased since inventories are
valued at standard cost.
ALTERNATIVE TO COMPUTING VARIANCES
If the company uses absorption costing with a direct labour hour absorption
rate, we can calculate an expenditure, capacity and efficiency variance for
fixed production overheads.
Budgeted absorption rate per hour:
Budgeted labour hours: 13,000 x 3 = 39,000 hrs
Budgeted fixed cost N600,000
Budgeted absorption rate: N600,000 /39,000 = N15.38
ALTERNATIVE SOLUTION
(c) Labour rate
The labour rate variance is favourable indicating a lower rate per hour was
paid than expected. This is perhaps because lower grade of labour were
used during production. Though less likely, it is possible that staff had a
pay cut imposed upon them/decrease in buy rate. Finally, an incorrect or
outdated standard could have been used.
Labour efficiency
This is significantly adverse, indicating staff took much longer than
expected to complete the output. This may relate to the favourable labour
rate variance, reflecting employment of less skilled or experienced staff.
Staff demotivated by a pay cut are also less likely to work efficiently.
It may also relate to the reliability of machinery as staff may have been
prevented from reaching full efficiency by unreliable equipment. Others
include:
- Decrease in machine set up time
- Idle time
- Lack of motivation
- Faulty equipment/Machine breakdown
- Topic: Standard Costing and Variance Analysis
- Series: NOV 2020
- Uploader: Kwame Aikins