- 20 Marks
MA – L2- Q28 – Standard Costing and Variance Analysis
Question
Zest Foods Ltd., a premium food manufacturer operating out of Tamale, is reviewing operations for a three-month period of 20X8. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available:
| Selling price | GH¢ 12.00 |
|---|---|
| Direct material A | 2.5 kg at GH¢ 1.70 per kg |
| Direct material B | 1.5 kg at GH¢ 1.20 per kg |
| Direct labour | 0.45 hrs at GH¢ 6.00 per hour |
Fixed production overheads for the three-month period were expected to be GH¢ 62,500.
Actual data for the three-month period was as follows:
- Sales and production: 48,000 units of ZP were produced and sold for GH¢ 580,800
- Direct material A: 121,951 kg were used at a cost of GH¢ 200,000
- Direct material B: 67,200 kg were used at a cost of GH¢ 84,000
- Direct labour: Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of GH¢ 117,120
- Fixed production overheads: GH¢ 64,000
Budgeted sales for the three-month period were 50,000 units of Product ZP.
Required:
(a) Calculate the following variances:
(i) Sales volume contribution and sales price variances;
(ii) Price, mix, and yield variances for each material;
(iii) Labour rate, labour efficiency, and idle time variances.
(b) Prepare an operating statement that reconciles budgeted gross profit to actual gross profit with each variance clearly shown.
Answer
(a) Variance Calculations
(i) Sales Volume Contribution and Sales Price Variances
Sales Volume Contribution per Unit:
| Standard sales price | GH¢ 12.00 |
|---|---|
| Material A (GH¢ 1.70 × 2.5) | 4.25 |
| Material B (GH¢ 1.20 × 1.5) | 1.80 |
| Labour (GH¢ 6.00 × 0.45) | 2.70 |
| Standard contribution | 3.25 |
Sales Volume Variance:
| Budgeted volume of sales | 50,000 units |
|---|---|
| Actual volume of sales | 48,000 units |
| Variance | (2,000) units |
| Unit contribution | GH¢ 3.25 |
| Variance (GH¢) | (2,000 × 3.25) = 6,500 (A) |
Sales Price Variance:
| Budgeted revenue for actual sales (GH¢ 12 × 48,000) | 576,000 |
|---|---|
| Actual sales revenue for actual sales | 580,800 |
| Variance | 4,800 (F) |
(ii) Price, Mix, and Yield Variances for Each Material
Direct Material Price Variances:
Material A Price Variance:
| Actual quantity × actual price | 200,000 |
|---|---|
| Actual quantity × standard price (GH¢ 1.70 × 121,951) | 207,317 |
| Price variance | 7,317 (F) |
Material B Price Variance:
| Actual quantity × actual price | 84,000 |
|---|---|
| Actual quantity × standard price (GH¢ 1.20 × 67,200) | 80,640 |
| Price variance | 3,360 (A) |
Material Mix and Yield Variances:
Standard Usage for Actual Output (48,000 units):
- Material A: 48,000 × 2.5 kg = 120,000 kg
- Material B: 48,000 × 1.5 kg = 72,000 kg
- Total standard usage: 120,000 + 72,000 = 192,000 kg
Actual Usage:
- Material A: 121,951 kg
- Material B: 67,200 kg
- Total actual usage: 121,951 + 67,200 = 189,151 kg
Material Mix Variance:
| Material | Actual Usage (kg) | Standard Mix for Actual Total Usage (kg) | Mix Variance (kg) | Standard Price (GH¢/kg) | Mix Variance (GH¢) |
|---|---|---|---|---|---|
| A | 121,951 | (189,151 × 2.5/4) = 118,219 | 3,732 (A) | 1.70 | 6,344 (A) |
| B | 67,200 | (189,151 × 1.5/4) = 70,932 | 3,732 (F) | 1.20 | 4,478 (F) |
| Total | 189,151 | 189,151 | 0 | 1,866 (A) |
Material Yield Variance:
| Standard usage for 48,000 units | 192,000 kg |
|---|---|
| Actual usage | 189,151 kg |
| Yield variance in kg | 2,849 (F) |
Standard weighted average cost per kg:
[(2.5 × 1.70) + (1.5 × 1.20)] / (2.5 + 1.5) = 6.05 / 4 = GH¢ 1.5125
Yield variance in GH¢:
2,849 × 1.5125 = 4,309 (F)
(iii) Labour Rate, Labour Efficiency, and Idle Time Variances
Labour Rate Variance:
| Actual hours paid × actual rate (GH¢ 117,120) | 117,120 |
|---|---|
| Actual hours paid × standard rate (19,200 × 6.00) | 115,200 |
| Rate variance | 1,920 (A) |
Labour Efficiency Variance:
| Standard hours for 48,000 units (48,000 × 0.45) | 21,600 hrs |
|---|---|
| Actual hours worked | 18,900 hrs |
| Efficiency variance in hours | 2,700 (F) |
| Standard rate | GH¢ 6.00 |
| Efficiency variance in GH¢ | 2,700 × 6.00 = 16,200 (F) |
Idle Time Variance:
| Actual hours paid | 19,200 hrs |
|---|---|
| Actual hours worked | 18,900 hrs |
| Idle time | 300 hrs |
| Standard rate | GH¢ 6.00 |
| Idle time variance | 300 × 6.00 = 1,800 (A) |
(b) Operating Statement
| Operating Statement | GH¢ | GH¢ |
|---|---|---|
| Budgeted gross profit (50,000 × 3.25) | 162,500 | |
| Sales volume variance | 6,500 (A) | |
| Sales price variance | 4,800 (F) | (1,700) (A) |
| Standard contribution on actual sales | 160,800 | |
| Variances: | ||
| Material A price | 7,317 (F) | |
| Material B price | 3,360 (A) | |
| Material mix | 1,866 (A) | |
| Material yield | 4,309 (F) | |
| Labour rate | 1,920 (A) | |
| Labour efficiency | 16,200 (F) | |
| Idle time | 1,800 (A) | |
| Fixed overhead expenditure (64,000 – 62,500) | 1,500 (A) | |
| Total variances | 17,280 (F) | |
| Actual contribution | 178,080 | |
| Less: Fixed overheads | 64,000 | |
| Actual gross profit | 114,080 |
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