- 16 Marks
MA – L2 – Q21 – Standard costing and variance analysis
Question
Tarkwa Manufacturing Ltd., based in Kumasi, uses a standard absorption costing system in accounting for its production costs.
The standard cost of a unit of product is as follows:
| Standard quantity | Standard price/rate (GH₵) | Standard cost (GH₵) | |
|---|---|---|---|
| Direct materials | 5 kilos | 6.00 | 30.00 |
| Direct labour | 20 hours | 4.00 | 80.00 |
| Variable production overhead | 20 hours | 0.20 | 4.00 |
| Fixed production overhead | 20 hours | 5.00 | 100.00 |
The following data relates to Period 1:
Budgeted output: 25,000 units
Actual output – produced: 20,000 units
Units sold: 15,000 units
Materials put into production: 120,000 kilos
Materials purchased: 200,000 kilos
Direct labour hours paid: 500,000 hrs
Due to a power failure, 10,000 hours were lost.
Cost of materials used (120,000 kg): GH₵825,000
Rate per direct labour hour: GH₵5
Variable production overhead: GH₵70,000
Fixed production overhead: GH₵2,100,000
Required:
Calculate, for Period 1:
- The material price variance
- The material usage variance
- The direct labour rate variance
- The direct labour idle time variance
- The direct labour efficiency variance
- The variable overhead total cost variance
- The fixed overhead expenditure variance
- The fixed overhead volume variance
- The total manufacturing cost variance
Answer
- Material Price Variance
120,000 kilos of materials should cost (× GH₵6) = 720,000
They did cost = 825,000
Material price variance = GH₵105,000 (A)
Note: Since the price variance is calculated on quantities used, this means that closing inventory is valued at their actual purchase price/cost rather than at standard price.
- Material Usage Variance
20,000 units should use (× 5 kilos) = 100,000 kilos
They did use = 120,000 kilos
Material usage variance in kilos = 20,000 (A)
Standard price per kilo of material = GH₵6
Material usage variance in GH₵ = GH₵120,000 (A) - Direct Labour Rate Variance
500,000 hours should cost (× GH₵4) = 200,000
They did cost (× GH₵5) = 250,000
Labour rate variance = GH₵50,000 (A) - Direct Labour Idle Time Variance
= 10,000 hours (A) × GH₵4 per hour = GH₵40,000 (A) - Direct Labour Efficiency Variance
20,000 units should take (× 20 hours) = 400,000 hours
They did take (500,000 – 10,000) = 490,000 hours
Efficiency variance in hours = 90,000 (A)
Standard rate per hour = GH₵4
Direct labour efficiency variance in GH₵ = GH₵360,000 (A) - Variable Overhead Total Cost Variance
20,000 units should cost (× GH₵4) = 80,000
They did cost = 70,000
Variable overhead total cost variance = GH₵10,000 (F) - Fixed Production Overhead Expenditure Variance
Budgeted fixed overhead expenditure (25,000 units × GH₵100) = 2,500,000
Actual fixed overhead expenditure = 2,100,000
Fixed overhead expenditure variance = GH₵400,000 (F) - Fixed Production Overhead Volume Variance
Budgeted production volume = 25,000 units
Actual production volume = 20,000 units
Volume variance in units = 5,000 (A)
Standard fixed overhead rate per unit = GH₵100
Fixed production overhead volume variance in GH₵ = GH₵500,000 (A) - Manufacturing Cost Total Variance
| Variance | Favourable (GH₵) | Adverse (GH₵) | |—|—|—| | Material price | | 105,000 | | Material usage | | 120,000 | | Direct labour rate | | 50,000 | | Direct labour idle time | | 40,000 | | Direct labour efficiency | | 360,000 | | Variable overhead cost | 10,000 | | | Fixed overhead expenditure | 400,000 | | | Fixed overhead volume | | 500,000 | | Total | 410,000 | 1,175,000 |
Manufacturing cost total variance = GH₵765,000 (A)
- Uploader: Salamat Hamid