Tag (SQ): Variance analysis

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  • 20 Marks

PSAF – L2 – Q13.4 – Budget Performance Analysis

Prepare a budget performance report for Nkong District Assembly based on the 2023 revenue and expenditure extract.

(a)

Prepare a budget performance report of Anlo District Assembly based on the extract below.

Annual budget GH¢’000 Revised budget GH¢’000 Actual performance GH¢’000
Decentralised transfer 32,000 35,000 42,000
Internally generated fund 56,000 45,000 33,000
Compensation 23,000 20,000 25,700
Goods and services 13,000 18,000 24,000
Non-financial asset 18,000 15,000 12,000

Answer:
Anlo District Assembly
Revenue and expenditure extract of Anlo District Assembly for the year ended 31 December 2023

Revised Budget GH¢ Actual Performance GH¢ Budget Outturn GH¢ Budget Outturn percentage (%)
Decentralised transfer 35,000,000 42,000,000 7,000,000 20.00
IGF 45,000,000 33,000,000 (12,000,000) (26.67)
Compensation 20,000,000 25,700,000 (5,700,000) (28.50)
Goods and services 18,000,000 24,000,000 (6,000,000) (33.33)
Non-financial asset 15,000,000 12,000,000 3,000,000 20.00

(b)

Write a report analyzing the budget outturn whilst assessing the likely causes of the variances during the year and discuss the limitations of your analysis.

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  • 20 Marks

MA – L2 – Q31 – Standard costing and variance analysis

Explain types of standards, purposes of standard costing, its problems, and calculate sales, material, wage, and overhead variances for NORGA LIMITED.

NORGA LIMITED

Required:

(a) Explain the following types of standards, stating one advantage and one disadvantage of each:

(i) Basic cost standard
(ii) Ideal standards
(iii) Currently attainable standard

(b) State five purposes of standard costing

(c) State seven problems of standard costing in a modern manufacturing environment

(d) From the information provided, calculate the following:

(i) Sales price and sales volume variances
(ii) The total material variance
(iii) The total wage variances
(iv) Total manufacturing overhead variances
(v) Reconciliation of budgeted profit to actual profit

Additional Information:

The following additional information was extracted from the management accounts:

GH₵
Budgeted net profit for the period 200,000
Actual profit 45,000

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  • 20 Marks

MA – L2 – Q30 – Budgetary control

Redraft budget statement for APP Limited, identify behavioural issues, and suggest steps to improve budgeting system.

APP LIMITED

APP Limited is a well-established book publishing company founded in the early 1950s, following the success of books published by Adio. The company has recently been acquired by Contemporary Publishing Group (CPG) – a multinational company operating across all continents.

Mr. Goodluck of CPG International has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by APP.

During his visit to all departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the Advanced Education Notebook Production Department (AENP) for period III was presented to him.

The budget statement presented was as shown below:

Budget statement for period III

Department: AENP Department

ACTUAL RESULTS GH₵’000 BUDGET GH₵’000 VARIANCES GH₵’000
Units produced 37,500 36,000
Labour hours 106,050
Sales 2,325 2,232 93 (F)
Material cost 756 720 (36) (A)
Labour cost 369 360 (9) (A)
Variable overhead 237 216 (21) (A)
Fixed overhead 177 168 (9) (A)
Other overhead 123 120 (3) (A)
Administration cost 150 144 (6) (A)
Total cost 1,812 1,728 (84) (A)
Profit 513 504 9 (F)

Mr. N. Kevin

Head of Department

Subsequent interaction with Mr. Kevin – AENP Department Manager, revealed that the budget statement presented was based on 36,000 units with a standard labour content of 2.85 hours per unit.

Mr. Goodluck observed that Kevin was not enthusiastic about the budget system. He saw it as a pressure system imposed by the company to penalize some managers. He pointed out that the system was hurriedly introduced by Sano Consult about twelve months ago. The consultant never took time to provide explanations that could assist users to understand the system. The experienced AENP Manager was doubtful about the competence of the consultant. He was of the opinion that the system introduced in APP Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all departments, and so the need to address the situation became very urgent.

The task of making the budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult, but your advice to Mr. Goodluck will assist tremendously in resolving the issue.

Required:

(a) Redraft the budget statement in a more informative manner.

(b) State the behavioural problems brought out in this situation.

(c) State the steps you think Mr. Goodluck should take.

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  • 20 Marks

MA – L2- Q29 – Standard Costing and Variance Analysis

Calculate budgeted output, material purchased, units produced, hours worked, wage rate, and causes of variances for KLM Enterprises Ltd.

KLM Enterprises Ltd. uses a standard costing system. The following profit statement summarises the performance of the company for August 20X3:

GH¢ GH¢
Budgeted profit 3,500
Favourable variance:
Material price 16,000
Labour efficiency 11,040 27,040
Adverse variance:
Fixed overheads expenditure (16,000)
Material usage (6,000)
Labour rate (7,520) (29,520)
Actual profit 1,020

The following information is also available:

  • Standard material price per unit (GH¢): 4.0
  • Actual material price per unit (GH¢): 3.9
  • Standard wage rate per hour (GH¢): 6.0
  • Standard wage hours per unit: 10
  • Actual wages (GH¢): 308,480
  • Actual fixed overheads (GH¢): 316,000
  • Fixed overheads absorption rate: 100% of direct wages

Required:
(a) Calculate the following from the given data:
(i) Budgeted output in units
(ii) Actual number of units purchased
(iii) Actual units produced
(iv) Actual hours worked
(v) Actual wage rate per hour
(b) State any two possible causes of favourable material price variance, unfavourable material usage variance, favourable labour efficiency variance, and unfavourable labour rate variance.

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  • 20 Marks

MA – L2- Q28 – Standard Costing and Variance Analysis

Calculate sales, material, and labour variances for Zest Foods Ltd. and prepare an operating statement reconciling budgeted to actual gross profit.

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.

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  • 10 Marks

MA – L2- Q27 – Advanced Variance Analysis

Calculate material price, mix, and yield variances for Product Z at Tamale Industries using standard and actual cost data.

Tamale Industries has the following standard cost for producing 1 unit of Product Z:

Material Quantity Price per kilo Cost
Material M 5 kilos GH¢8 GH¢40
Material N 3 kilos GH¢12 GH¢36

Actual results showed that 9,600 kilos of materials were used during a particular period as follows:

Material Quantity Cost
Material M 6,700 kilos GH¢51,400
Material N 2,900 kilos GH¢39,500

During the period, 1,250 units of Product Z were produced.

Required:
(a) Calculate the following variances:

  • Direct materials price variance
  • Materials mix variance
  • Materials yield variance

    (b) Summarize the standard materials cost, materials price variance, materials mix variance, materials yield variance, and actual materials cost.

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  • 9 Marks

MA – L2 – Q26 – Standard Costing and Variance Analysis

Calculate standard cost sheet for Product AB using given actual costs and variances to determine standard costs and rates.

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:

  1. Standard price for materials.
  2. Standard quantity of materials per unit.
  3. Standard time per unit for labour.
  4. Variable production overhead rate per hour.

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  • 15 Marks

MA – L2 – Q24 – Standard costing and variance analysis

Calculate sales price variance for three products using actual and standard selling prices for TRK Limited.

TRK Limited operates an absorption costing system and sells three products, B, R, and K, which are substitutes for each other. The following standard selling price and cost data relate to these three products:

Product Selling price per unit Direct material per unit Direct labour per unit
B GH₵14.00 3.00 kg at GH₵1.80 per kg 0.5 hrs at GH₵6.50 per hour
R GH₵15.00 1.25 kg at GH₵3.28 per kg 0.8 hrs at GH₵6.50 per hour
K GH₵18.00 1.94 kg at GH₵2.50 per kg 0.7 hrs at GH₵6.50 per hour

Budgeted fixed production overhead for the last period was GH₵81,000. This was absorbed on a machine hour basis. The standard machine hours for each product and the budgeted levels of production and sales for each product for the last period are as follows:

Product B R K
Standard machine hours per unit 0.3 hrs 0.6 hrs 0.8 hrs
Budgeted production and sales (units) 10,000 13,000 9,000

Actual volumes and selling prices for the three products in the last period were as follows:

Product B R K
Actual selling price per unit GH₵14.50 GH₵15.50 GH₵19.00
Actual production and sales (units) 9,500 13,500 8,500

Required:
(a) Calculate the sales price variance for overall sales for the last period.                                                                                                       (b) Calculate the sales volume profit variance for overall sales for the last period.

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  • 10 Marks

MA – L2 – Q23 – Advanced Variance Analysis

Calculate total materials cost variance for Tamale Chemicals and analyze into price, usage, yield, and mix components for GreenLube production.

Tamale Chemicals, based in Tamale, has the following standard cost for producing 9 litres of GreenLube:

  • 5 litres of Material X at GH₵0.70 per litre
  • 5 litres of Material Y at GH₵0.92 per litre.

There are no inventories of materials, and all material price variances relate to materials used. Actual results showed that 100,000 litres of materials were used during a particular period as follows:

  • 45,000 litres of Material X: cost GH₵36,000
  • 55,000 litres of Material Y: cost GH₵53,350

During the period, 92,070 litres of GreenLube were produced.

Required:
Calculate the total materials cost variance and analyse it into its price, usage, yield, and mix components.

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  • 20 Marks

MA – L2 – Q22 – Standard Costing and Variance Analysis

Prepare an operating statement for Tarkwa Industries using standard absorption costing for Product Z, showing specific variances.

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.

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