- 14 Marks
MA – L2 – Q20 – Standard costing and variance analysis
Question
The following data were extracted from South-East Enterprises’ records for July 20X8 in respect of product EAGLE:
Standard cost/unit
| Raw material (50kg @ GH₵5 per kg) | 250 |
| Labour (2 hours @ GH₵60 per hour) | 120 |
Budget
Production: 2,000 Units
Fixed overheads: GH₵1,500,000
Variable overheads: GH₵1,800,000
Labour hours: 4,000
Standard hours of production: 4,000
Actual
Production: 2,400 Units
Direct material purchased: 110,000 kg @ GH₵605,000
Opening inventory direct material: 1,000 kg
Closing inventory direct material: 4,000 kg
Wages paid (4,900 hours): GH₵318,500
Fixed overhead: GH₵1,650,000
Variable overhead: GH₵2,280,000
Required:
Compute the following variances:
(a) Material price variance
(b) Material usage variance
(c) Labour rate variance
(d) Labour efficiency variance
(e) Variable overhead expenditure variance
(f) Variable overhead efficiency variance
(g) Fixed overhead efficiency variance
Answer
(a) Material Price Variance
= (Actual Purchase Quantity × Actual Price) – (Actual Purchase Quantity × Std Price)
= 605,000 – 110,000 × 5
= 605,000 – 550,000
= GH₵55,000 (Adverse)
(b) Material Usage Variance
= (Actual quantity used for Actual Production × Std price) – (Std Qty for Actual Production × Std price)
= 107,000 × GH₵5 – 2,400 × 50 × GH₵5
= 535,000 – 600,000
= GH₵65,000 (favourable)
(c) Labour Rate Variance
= (Actual Labour hours × Actual Rate) – (Actual Labour hours × Standard Rate)
= GH₵318,500 – 4,900 × GH₵60
= GH₵318,500 – GH₵294,000
= GH₵24,500 (A)
(d) Labour Efficiency Variance
= (Actual Labour hours × Std Rate) – (Std Labour Hours for Actual Production × Std Rate)
= 4,900 × GH₵60 – 4,800 × GH₵60
= GH₵294,000 – GH₵288,000
= GH₵6,000 (favourable)
(e) Variable Overhead Expenditure Variance
= (Actual Variable overheads) – (Actual hours × VOAR)
= GH₵2,280,000 – 4,900 × GH₵450
= 2,280,000 – GH₵2,205,000
= GH₵75,000 (Adverse)
(f) Variable Overhead Efficiency Variance
= (Actual Hours × VOAR) – (Standard Hour of Production × VOAR)
= 4,900 × GH₵450 – 4,800 × GH₵450
= GH₵2,205,000 – GH₵2,160,000
= GH₵45,000 (favourable)
(g) Fixed Overhead Efficiency Variance
= (Actual Labour Hrs × FOAR) – (Standard Labour Hrs of Production × FOAR)
= 4,900 × GH₵375 – 4,800 × GH₵375
= GH₵1,837,500 – GH₵1,800,000
= GH₵37,500 (Adverse)
Variable Overhead Absorption Rate (VOAR)
VOAR = Budgeted Variable Overheads / Budgeted activity level
= GH₵1,800,000 / 4,000 hrs
= GH₵450/hr
Fixed Overhead Absorption Rate (FOAR)
FOAR = Budgeted fixed overhead / Budgeted activity level
= GH₵1,500,000 / 4,000 hrs
= GH₵375/hr
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