- 9 Marks
MA – L2 – Q26 – Standard Costing and Variance Analysis
Question
Standard marginal production cost – Product AB
| Direct materials | (8 kilos at GH¢1.50 per kilo) |
| Direct labour | (2 hours at GH¢4 per hour) |
| Variable production overhead | (2 hours at GH¢1 per hour) |
| Standard marginal production cost |
Tutorial note: This problem tests your understanding of the formulae for calculating variances. Here, you are given the actual costs and the variances, and have to work back to calculate the standard cost. The answer can be found by filling in the balancing figures for each variance calculation.
Workings
Materials price variance
150,000 kilos of materials did cost
Material price variance
150,000 kilos of materials should cost
(The variance is favourable, so the materials did cost less to buy than they should have cost.)
Materials usage variance
Materials usage variance in GH¢ = GH¢9,000 (A)
Standard price for materials = GH¢1.50
Materials usage variance in kilograms = 9,000 / 1.50 = 6,000 kilos (A) kilos
18,000 units of the product did use
Material usage variance in kilos
18,000 units of the product should use
Required:
Calculate the standard cost sheet for Product AB, including:
- Standard price for materials.
- Standard quantity of materials per unit.
- Standard time per unit for labour.
- Variable production overhead rate per hour.
Answer
Materials price variance
| GH¢ | |
|---|---|
| 150,000 kilos of materials did cost | |
| Material price variance | |
| 150,000 kilos of materials should cost | 225,000 |
(The variance is favourable, so the materials did cost less to buy than they should have cost.)
Therefore, the standard price for materials is GH¢225,000 / 150,000 kilograms = GH¢1.50 per kilo.
Materials usage variance
| Materials usage variance in GH¢ | GH¢9,000 (A) |
| Standard price for materials | GH¢1.50 |
| Materials usage variance in kilograms | 9,000 / 1.50 = 6,000 kilos (A) kilos |
| 18,000 units of the product did use | 150,000 |
| Material usage variance in kilos | 6,000 (A) |
| 18,000 units of the product should use | 144,000 |
Therefore, the standard quantity of materials per unit of product = 144,000 kilos / 18,000 units = 8 kilos per unit.
Labour rate variance
| GH¢ | |
|---|---|
| 36,000 hours did cost | |
| Labour rate variance | 3,600 (F) |
| 36,000 hours should cost | 144,000 |
Therefore, the standard labour rate per hour = GH¢144,000 / 36,000 hours = GH¢4 per hour.
Labour efficiency variance
| 18,000 units should take | 36,000 hours |
| They did take | 36,000 hours |
| Variance in hours | 0 hours |
| Standard labour rate per hour | GH¢4 |
| Labour efficiency variance in GH¢ | GH¢0 |
Therefore, the standard time per unit of product = 36,000 hours / 18,000 units = 2 hours per unit.
This number of hours per unit also applies to variable production overheads.
Variable overhead expenditure variance
| GH¢ | |
|---|---|
| 32,000 hours did cost | 38,000 |
| Variable overhead expenditure variance | 6,000 |
| 32,000 hours should cost | 32,000 |
Therefore, the variable production overhead rate per hour = GH¢32,000 / 32,000 hours = GH¢1 per hour.
Standard marginal production cost – Product AB
| Direct materials | (8 kilos at GH¢1.50 per kilo) = GH¢12.00 |
| Direct labour | (2 hours at GH¢4 per hour) = GH¢8.00 |
| Variable production overhead | (2 hours at GH¢1 per hour) = GH¢2.00 |
| Standard marginal production cost | GH¢22.00 |
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