- 14 Marks
MA – L2 – Q18- Standard Costing and Variance Analysis
Question
GrainWorks Plc uses a standard costing system. Fixed production overhead is absorbed on the basis of direct labour hours. The following data relate to a particular period of operation:
| Description | Value |
|---|---|
| Standard price of material/kg | GH₵45.90 |
| Actual material issued to production | 4,110 kg |
| Standard labour hours | 1,680 |
| Actual direct labour hours | 1,760 |
| Actual fixed overhead | GH₵45,620 |
The following variances were calculated at the end of the period:
| Variance | Value |
|---|---|
| Direct material cost | GH₵702 (A) |
| Direct material usage | GH₵531 (F) |
| Direct labour efficiency | GH₵336 (A) |
| Direct labour cost | GH₵16 (F) |
| Fixed overhead cost | GH₵92 (F) |
Required:
(a)(i) Calculate the standard quantity of material.
(ii) Calculate the actual price of material per kg.
(iii) Calculate the standard direct labour rate.
(iv) Calculate the actual direct labour rate.
(b) State TWO benefits to be obtained from the installation of a standard costing system.
Answer
(a)(i)
Standard quantity:
Usage variance = SP (SQ – AQ)
531 (F) = Difference in Qty × GH₵45.90
Difference in Qty = 531 (F) / 45.90 = 11.57 (F) ≈ 12 kg (F)
Standard Qty = 4,110 + 12 = 4,122 kg
(ii)
Actual price of material per kg:
Material cost variance = Usage variance + Price variance
GH₵702 (A) = GH₵531 (F) + Price variance
Price variance = GH₵702 (A) + 531 (A) = GH₵1,233 (A)
Difference in price = GH₵1,233 (A) / 4,110 = GH₵0.30 (A)
Actual price = GH₵45.90 + GH₵0.30 = GH₵46.20
(iii)
Standard direct labour rate:
Efficiency variance = SR (Standard hours – Actual hours)
336 (A) = SR (1,680 – 1,760)
336 (A) = 80 (A) × SR
SR = GH₵336 (A) / 80 = GH₵4.20
(iv)
Actual direct labour rate:
Direct labour cost variance = Rate variance + Efficiency variance
16 (F) = Rate variance + 336 (A)
Rate variance = (16 + 336) F = 352 F
Difference in rate = 352 F / 1,760 = 0.2 F
Actual rate = (4.20 – 0.2) = GH₵4.00
(B)
Some benefits to be derived from the installation of a standard costing system include:
- The efficiency of employees and production processes can be measured and controlled.
- Variances from standards are highlighted, thereby focusing management attention on the exceptions and saving the manager’s time.
- Tags: Direct Labour, Fixed Overhead, Material Usage, Standard Costing, Variance analysis
- Level: Level 2
- Uploader: Salamat Hamid