- 20 Marks
MA – L2 – Q22 – Standard Costing and Variance Analysis
Question
Tarkwa Industries uses a standard absorption costing system. Standard data per unit of Product Z is as follows:
| GH₵ per unit | GH₵ per unit | |
|---|---|---|
| Standard sales price | 6.00 | |
| Direct labour cost | 0.64 | |
| Direct material cost | 3.00 | |
| Variable production overheads | 0.16 | |
| 3.80 | ||
| Contribution | 2.20 | |
| Fixed overheads | 0.20 | |
| Profit | 2.00 |
The budgeted production and sales volume for Product Z was 12,000 units. Budget for 2,400 direct labour hours (12,000 units):
- 5 units to be produced per hour
- Standard labour cost is GH₵3.20 per hour
- Standard material cost is GH₵1.50 per kilogram and each unit requires 2 kilos
- Budgeted fixed overheads GH₵2,400
- Budgeted variable overhead cost per direct labour hour = GH₵0.80.
Actual results for the same period:
- 11,500 units were manufactured
- 2,320 direct labour hours were worked, and cost GH₵7,540
- 25,000 kilos of direct material were purchased (and used) at a cost of GH₵1.48 per kilogram.
Other information:
- Inventory is valued at standard cost of production.
- Actual variable overheads were GH₵1,750
- Actual fixed overheads were GH₵2,462
- 10,000 units were sold for GH₵62,600.
Required:
Prepare operating statements for the period using:
(a) standard absorption costing.
To prepare the absorption costing operating statement, you should show the variable overhead expenditure and efficiency variances, and the fixed overhead expenditure and volume variances.
(b) standard marginal costing.
Answer
(A)
Standard absorption costing
Budgeted fixed overheads = GH₵2,400
Budgeted labour hours = 2,400 hours
Budgeted fixed overhead rate per hour = GH₵1.
Materials price variance
25,000 kilos of materials should cost (× GH₵1.50) GH₵37,500
They did cost (× GH₵1.48) GH₵37,000
Material price variance GH₵500 (F)
Materials usage variance
11,500 units of Product Z should use (× 2 kilos) 23,000 kilos
They did use 25,000 kilos
Material usage variance in kilos 2,000 (A)
Standard price per kilo of material GH₵1.50
Material usage variance in GH₵ GH₵3,000 (A)
The material price variance and the material usage variance add up to the material total cost variance.
Direct labour rate variance
2,320 hours should cost (× GH₵3.20) GH₵7,424
They did cost GH₵7,540
Labour rate variance GH₵116 (A)
Direct labour efficiency variance
11,500 units of Product Z should take (× 0.20 hours) 2,300 hours
They did take 2,320 hours
Efficiency variance in hours 20 (A)
Standard rate per hour GH₵3.20
Direct labour efficiency variance in GH₵ GH₵64 (A)
Variable overhead expenditure variance
2,320 hours should cost (× GH₵0.80) GH₵1,856
They did cost GH₵1,750
Labour rate variance GH₵106 (F)
Variable overhead efficiency variance
= 20 hours (A) × GH₵0.80 per hour = GH₵16 (A).
Fixed production overhead expenditure variance
Budgeted fixed overhead expenditure GH₵2,400
Actual fixed overhead expenditure GH₵2,462
Fixed overhead expenditure variance GH₵62 (A)
Fixed production overhead volume variance
Budgeted production volume 12,000 units
Actual production volume 11,500 units
Volume variance in units 500 (A)
Standard fixed overhead rate per unit GH₵0.20
Fixed production overhead volume variance in GH₵ GH₵100 (A)
Sales price variance
10,000 units should sell for (× GH₵6) GH₵60,000
They did sell for GH₵62,600
Sales price variance GH₵2,600 (F)
Sales volume profit variance
Actual sales volume (units) 10,000
Budgeted sales volume (units) 12,000
Sales volume variance in units 2,000 (A)
Standard profit per unit GH₵2
Sales volume variance (profit variance) GH₵4,000 (A)
Operating statement (standard absorption costing)
Budgeted profit (12,000 units × GH₵2) GH₵24,000
Sales price variance GH₵2,600 (F)
Sales volume variance GH₵4,000 (A)
| (F) GH₵ | (A) GH₵ | |
|---|---|---|
| Material price | 500 | |
| Material usage | 3,000 | |
| Labour rate | 116 | |
| Labour efficiency | 64 | |
| Variable production overhead expenditure | 106 | |
| Variable production overhead efficiency | 16 | |
| Fixed production overhead expenditure | 62 | |
| Fixed production overhead volume | 100 | |
| Total | 606 | 3,358 |
Total variable cost variances GH₵2,752 (A)
Actual profit GH₵18,848 (B)
Operating statement: standard marginal costing
| Variable cost variances | (F) GH₵ | (A) GH₵ |
|---|---|---|
| Direct materials price | 500 | |
| Direct materials usage | 3,000 | |
| Direct labour rate | 116 | |
| Direct labour efficiency | 64 | |
| Variable production o’head expenditure | 106 | |
| Variable production o’head efficiency | 16 | |
| Total variable cost variances | 606 | 3,358 |
Actual contribution GH₵20,310
Budgeted fixed overhead expenditure GH₵2,400
Fixed overhead expenditure variance GH₵62 (A)
Actual fixed production overheads GH₵2,462
Actual profit GH₵18,848
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