STANDARD COSTING WITH SOLUTIONS

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1 STANDARD COSTING WITH SOLUTIONS Question 1: Calculate Material Price Variance and Material Usage Variance: Standard (1 FG) Actual (1 FG) Kg Rate Amount Kg Rate Amount (` 18, ,80,000 20,000 5, ,40,000 1,00,000 After analysing, it was found that out of 25,000 unit, 5,000 units were purchased as an emergency order at higher ` 20. Material Price Variance = (S.P. A.P.) A.S. = (10 12) 20,000 + (10 12) 5,000 = ` 50,000 (A) Material Usage Variance = Excess price variance due to emergency order + (S.Q. A.Q.) S.P. = (12 20) 5,000 + (18,000 25,000) 10 = ` 1,10,000 (A) Question 2: A manufacturing concern which has adopted standard costing furnishes following information: Standard Material for 70 kg of Finished Products 100 kg Price of Materials ` 1 per Kg Actual: Output 2,10,000 Kg Materials used 2,80,000 Kg Cost of materials ` 2,52,000 Calculate (a) Material Usage Variance (b) Material Price Variance (c) Material Cost Variance. Standard (Output 2,10,000 kg) Data for Material Variance (2,10,000 kg) Actual (Output 2,10,000 kg) Qty. Rate Amount Qty. Rate Amount 3,00,000 kg 1 3,00,000 2,80, ,52,000 Statement of Variance Sl. No. Particulars Basis Amount Material Usage Variance Material Price Variance Material Cost Variance (Std.Qty. A.Qty.) S.P. (3,00,000 2,80,000) 1 (S.P. A.P.) A.S. (1 0.90) 2,80,000 (Material Usage + Material Price Variance) i.e. SC AC 20,000 Favourable 28,000 Favourable 48,000 Favourable

2 Question 3: From the data given below, calculate the material price variance, the materials usage variance and material cost variance. Consumption per 100 Units of Product Raw material Standard Actual A B Standard Item Qty. Rate Amount A B ` 50 per unit 60 ` 40 per unit Data for Material Variances 2,000 2, ` 50 per unit 60 `45 per unit Actual Item Qty. Rate Amount A B ,500 2,700 4, ,200 Statement of Variances Sl. No. Particulars Basis Amount Material Price Variance Material Usage Variance (S.P. A.P.) A.Q. A (50 50) 50 = 0 B (40 45) 60 = 300 Adverse (S.Q A.Q.) S.R A (40 50) 50 = 500 B (60 60) 40 = (Adverse) 500 (Adverse) Material Cost Variance = Material Price Variance + Material Usage Variance = 300 (A) (A) = ` 800 (A) OR Material Cost Variance = Standard Cost Actual Cost = 4,400 5,200 = ` 800 (Adverse) Question 4: From the following information, compute (a) Cost Variance (b) Price and (c) Usage Variance. Material A Material B Material C Total Standard Actual Quantity Unit Price Total Quantity Unit Price Total

3 Data for Material Variance Budgeted/Standard (1 FG) Actual (1 FG) Amount Item Qty. Rate Amount A B C A B C Statement of Variance Sl. No. Particulars Basis Amount Material Price Variance Material Usage Variance Material Cost Variance (S.R. A.R.) AQ A (2 3) 5 = 5 (A) B (3 6) 10 = 30 (A) C (6 5) 15 = 15 (F) (S.Q. A.S.) S.R. A (10 5) 2 = 10 (F) B (20 10) 3 = 30 (F) C (20 15) 6 = 30 (F) M.P.V. + M.U.V. 20 (A) + 70 (F) 20 (A) 70 (F) 50 (F) Question 6: Vinak Ltd. produces an article by blending two basic raw materials. It operates a standard costing system and the following standards have been set for raw materials: Material Standard Mix Standard Price per kg A 40% `4.00 B 60% ` 3.00 The standard loss in processing is 15%. During April, 1980, the company produced 1,700 kg of finished output. The position stock and purchases for the month of April, 1980 is as under: Material Stock on of kg Stock on kg Purchased during April 1980 A B kg 800 1,200 Cost 3,400 3,000 Calculate the following Variances: (i) Material Price Variance (ii) Material Usage Variance (iii) Material Yield Variance (iv) Material Mix Variance (v) Total Material Cost Variance. Data for Material Variances Material Budgeted Standard Standard Actual for Actual

4 A B Sl. No Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount , , ,600 1,212 1, , ,000 6,800 2,020 6, Statement of Variance Particulars Basis Amount Material Price Variance (S.P. A.P.) A.Q. A: ( ) 830 = 199 (A) B: ( ) 1190 = 575 (F) 376 (F) Material Usage Variance (S.Q. A.Q.) S.R. A: ( ) 4 = 120 (A) B: (1,200 4,190) 3 = 30 (F) 90 (A) Material Yield Variance (Standard Ratio for total standard quantity Standard ratio for total actual quantity) S.R. A: ( ) 4 = 32 (A) B: (1,200 1,212) 3 = 36 (F) 68 (A) Material Mix Variance (Standard Ratio for actual mix Actual ratio for actual mix) S.R. A: ( ) 4 = 88 (A) B: (1,212 1,190) 3 = 66 (F) 22 (A) Material Cost Variance Material price variance + Material Usage Variance 286 (F) 376 (F) + 90 (A) Actual price per kg. Material A:- ` = ` = ` Material B:- ` = ` 2995 = ` Question 7: Modern Tiles Ltd manufactures plastic tiles of standard size of 6 6 1/8. From the following information, you are required to calculate following variances for direct materials: I. The cost variance in total: 1. The cost variance sub-divided into (a) price (b) usage, and 2. The usage variance analysed to show (a) mixture (b) yield. A standard mix of the compound 20,000 square feet required to produce an output of tiles of 1/8 thickness is as follows Direct Materials Qty. (kg) Price (` per kg)

5 A B C During December 1991, eight mixes were processed and actual materials consumed were as follows: Direct Materials Qty. (kg) Price (` per kg) A B C 5,000 2,900 4, Actual production for December was 6,20,000 tiles. Data for Material Variance Materials Budgeted (80,000) Standard (6,20,000) S.Q. for Act. Mix Actual (6,20,000) Materials Qty. Rate Qty. Rate Qty. Qty. Rate A B C ,500 4,650 3,100 3, ,650 6,200 11,625 4,920 3,280 4,100 5,000 2,900 4, ,000 11,600 22, ,475 12,300 43,600 Statement of Variance S.. No. Particulars Basis Material Price Variance (M.P.V.) Material Usage Variance (M.U.V.) Material Mix Variance Material Yield Variance Material Cost Variance (S.R. A.R.) A.Q. A (1 2) 5000 = 5000(A) B (2 4) 2900 = 5800(A) C (3 5) 4400 = 8800(A) (S.Q. A.Q.) S.P. A ( ) 1 = 350(A) B ( ) 2 = 400(F) C ( ) 3 = 1575(A) (S.Q. for actual mix Actual Quantity) S.P. A ( ) 1 = 80(A) B ( ) 2 = 760(F) C ( ) 3 = 900(A) (Standard quantity Standard ratio for actual quantity) S.P. A ( ) 1 = 270(A) B ( ) 2 = 360(A) C ( ) 3 = 675(A) M.P.V. M.U.V. 19,600(A) (A) Amount 19,600 (A) 1,525 (A) 220 (A) 1,305 (A) 21,125 (A) Working Notes: Calculation of Budgeted No. of Tiles NO. of Tiles= A/a = 20,000 Sq. Ft/6 X 6 sq. inch = 20,000 X12 X 12 sq. inch/36 X sq inch = 80,000 units Question 8: From the data given below, calculate Particulars X Y

6 Raw material purchases Issue to works Works stock of material: Opening Closing Qty. (kg) Value Qty. (kg) Value 2,000 kg ` 4,000 5,000 ` 6,250 2,150 kg 3, kg 200 kg 1,000 1,250 Standard Price: Material X ` 1.90 per kg, Material Y ` 1.30 per kg. Standard Usage: Material X Material Y Product A 1 kg 1 kg Product B 0.5 kg 1 kg Output during the period: Product A 1,130 units, Product B 2,550 units. The following data is given 1. Calculate the individual material price variances for the two materials X and Y assuming that price variances are calculated at the time of purchase. 2. Calculate the individual material usage variances for material X and Y assuming that there was no work in progress either at the commencement or at the end of the period. Data for material variance Budgeted/Standard Standard Raw Material Qty. (W.N. 1) Rate Amount Qty. (W.N. 2) Rate Amount X Y 2,405 3, , , ,250 3,700 Statement of Variances ,500 4,625 Sl. No. Particulars Basis Amount Material Price Variance Material Usage Variance (S.R A.R.) A.Q. purchaser Material X (1.90 2) 2,000 Material Y ( ) 5,000 (S.Q A.Q.) S.R. Material X (2,405 2,250) 1.90 Material Y (3,680 3,700) (A) 250 (F) (F) 26 (A) Working Notes: 1. Calculation of Standard Quantity of Raw Material Required Material X: No. of products Material required/unit of product = (1,130 1) + (2, ) = 1, ,275 = 2,405 kg Material Y: (1,130 1) + (2,250 1) = 3,380 kg 2. Calculation of Actual Quantity Consumed Opening Stock at works Issue to works by purchase department Material X (kg) Y (kg) 300 2,150 1,000 3,950

7 ( ) Closing stock at works 2, ,950 1,250 Actual consumption 2,250 3, Question 9: (Break up of Material Cost Variances when standard mix and actual usage are given) X Ltd is producing floor covers in roll of standard size measuring 3 m wide and 30 m long by feeding raw materials to a continuous process machine. Standard mixture fixed for a batch of 900 sq. m of floor cover is as follows: 2,000 kg of material A at ` 1.00/kg 800 kg of material B at ` 1.50/kg 20 gallons of material C at `` 30/gallon. During the period, 1505 standard size rolls were produced from the material issued for 150 batches. The actual usage and the cost of materials were: 3,00,500 kg of material A at ` 1.10/kg 1,19,600 kg of material B at ` 1.65/kg 3,100 gallons of material C at `29.50/gallon. Present the figures to management showing the break-up of material cost variances arising during the period. A B C Data for Variance Budgeted Actual Qty Rate Amount Qty Rate Amount 2, ,000 1, ,00,500 1,19,600 3, ,30,550 1,97,340 91,450 1 lot 3, lot 6,19,340 A B C Standard Qty Rate Amount 3,01, ,01,000 1,20, ,80,600 3, , lot 5,71,900 Material Price Variance: A = (1 1.1) 3,00,500 = 30,050 (A) ( ) 1,19,600 = 17,940 (A) C = ( ) 3,100 = 1,550(F) = 46,440 (A) Material Usage Variance= (SQ AQ) SR

8 A: (3,01,000 3,00,500) 1 = 500(F) B: (1,20,400 1,19,600) 1.5 = 1200(F) C: (3,010-3,100) X 30 =2,700 (1,000) (A) Material Cost Variance: = SC AC Or MPV + MUV = (46,440) + (1,000) = (47,440) (A) Question 10: 1 kg of product K requires two chemicals A and B. The following were the details of product K for the month of June 1987: 1. Standard mix Chemical A 50% and Chemical B 50%. 2. Standard price per kilogram of Chemical A ` 12 and Chemical B ` Actual input of Chemical B 70 kilograms. 4. Actual price per kilogram of Chemical A ` Standard normal loss 10% of total input. 6. Materials cost variance total ` 650 adverse. 7. Materials yield variance total `` 135 adverse. Required: Calculate: Material mix variance total Material usage variance total Material price variance total Actual loss of actual input Actual input of Chemical A Actual price per kilogram of Chemical B Standard Data for Material Variance Actual Material Qty. (kg) Rate (`/kg) Amount Standard Ratio for Actual Mix Qty. (kg) Rate (`/kg) Amount A B ,400 (B.f.) 100 for 90G 1, (W.N. 2) 2,000 Statement of Requirement 1. Material Mix Variance= (Standard Ratio for Actual Mix Actual Ratio for Actual Mix) Standard Rate = (55 40) 12 + (55 70) 15 = (15 12) + ( 15 15) = 15 3 = 45 = 45 (A) 2. Material Usage Variance= (S.Q. A.Q.) S.R.

9 = (50 40) 12 + (50 70) 15 = 180 (A) 3. Material Price Variance= (S.R. A.R.) A.Q. =(12 15 ) X 40 + (15 20) X 70 = 470 (A) 4. Actual Loss = (110 90) = ` 20/kg 5. Actual Input of Chemical A = = ` 40/kg 6. Actual Price per Kg of Chemical B = ` 1,400/70 = ` 20/ kg Working Notes:. M.C.V = S.C. A.C = 1,350 A.C. Actual Cost = 1, = 2, Material Yield Variance = (Total Standard Quantity Total Actual Quantity) Standard Weighted Avg. Rate -135 = (100 T.A.Q) X 1,350/100-13,500 1,350 = 100 T.A.Q = 100 T.A.Q. Total Actual Quality = = 110 kg Question 12: The following information is provided. Standard Wages: Grade X: 90 Labourers at ` 2 per hour Actual Wages: Grade Y: 60 Labourers at ` 3 per hour Grade X: 80 Labourers at ` 2.50 per hour Grade Y: 70 Labourers at ` 2.00 per hour Budgeted Hours 1,000; Actual Hours 900; Budgeted Gross Production 5,000 units; Standard loss 20%; Actual Loss 900 units. Required: Calculate the labour variances from the above information. Data for Labour Variances Material Lab. Hrs Rate X Y 90 1,000 = 90, ,000 = 60,000 1,50,000 Budgeted (4000) Standard (4100) Actual (4100 units) `/hr 2 3 Amount (` 1,80,000 1,80,000 3,60,00 Lab. Hrs (W.N. 2) 92,250 61,500 1,53, Rate Amount 1,84,500 1,84,500 3,69,000 Lab. Hrs = 72, = 63,000 1,35,000 Rate Amount ,80,000 1,26,000 3,06,000 Statement of Variance Sl. No. Particulars Basis Amount

10 1. 2. Labour rate variances Labour efficiency variance (S.R. A.R.) Actual payment hours Grade X (2 2.50) 72,000 = 36,000 (A) Grade Y (3 2) 63,000 = 63,000 (F) (Standard hour Actual work hrs.) Standard rate Grade X (92,250 72,000) 2 = 40,500 (F) Grade Y (61,500 63,000) 3 = 4500 (F) 27,000 (F) 36,000 (Fav.) Working Notes: 1. Calculation of Net Production Gross Production ( ) Loss (Normal) Net Production Budgeted (Units) 5,000 1,000 (20% of 5,000) 4,000 Actual (Units) 5,000 9,00 4,100 We should assume that Budgeted gross & actual gross production will be same. 2. Calculation of Revised Budgeted Hrs. X: 4,000 F.G. = 90,000 Labour Hrs. 1 F.G 90,000 LAbour Hrs. 4, F.G. = 90,000 4,000 X 4,100 Labour Hr. = 92,250 Labour Hrs. Y: 4,000 F.G. = 60,000 Labour Hrs. 1 F.G 60,000 LAbour Hrs. 4, F.G = 60,000 X 4,100 Labour HRs. 4,000 = 61,500 Labour Hrs Question 13: A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at standard hourly rates of ` 1, ` 2 and ` 3, respectively. In a normal working week of 40 hours the gang is expected to produce 1,000 units of output. In a certain week, the gang consisted of 13 men, 4 women and 3 boys. Actual wages were paid at the rates of ` 3, ` 4 and ` 5, respectively. Two hours were lost due to abnormal idle time and 960 units of output were produced. Calculate various labour variances. Men Women Data for Labour Variance Budgeted (1000) Revised Budgeted (960) Actual (960) Actual Working Hours Lab Hr. Rate Amount Lab Hr. Rate Amount Lab Hr. Rate Amount ,

11 Boys , , , Statement of Labour Variance Sl. No. Particulars Basis Labour Cost Variance Labour Rate Variance (S.C. A.C.) (S.R. A.R.) Actual Payment Hrs Men: (1 3) 520 = 1040 (A) Women: (2 4) 160 = 320 (A) Boys: (5 43) 120 = 240 (A) Amount 1,456 (A) 1,600 (A) 3. Labour Efficiency Variance (Standard Hrs. Actual Working Hours) S.R. Men: ( ) 1 = 110 (A) Women: ( ) 2 = 80 (F) Boys: ( ) 3 = 234 (F) 204 (F) 4. Labour Idle Time Variance (Idle Time S.R.) Men: Women: Boys: = 26 (A) = 16 (A) = 18 (A) 60 (A) Question 16: The details regarding the composition and the weekly wage rates of labour force engaged on a job scheduled to be completed in 30 weeks are as follows: Standard Category or No. of Labourers Weekly wage rate Workers per Labourer Skilled Semi-skilled Unskilled The work is actually completed in 32 weeks. Required: Calculate the various labour variances. Data for Labour Variance No. of Labourers Category Budget/Revised Actual Category Skilled Semi-skilled Unskilled Time (weeks) 2,250 1,350 1,800 Rate (`/week) Amount 1,35,000 54,000 54,000 Standard Ratio for Actual Mix (weeks) 2,250 2,400 (5400 5,760 1,350 1,440 ( ,760 1,800 1,920 (5400 5, Actual Weekly wage rate per Labourer Qty. Rate Amount 2, ,560 5, ,56,800 48,000 51, ,43, ,760 2,56,000

12 Sl. No. 1. Statement of Labour Variances Particulars Basis Amount Labour cost variance Standard Cost Actual Cost 2,43,000 2,56,000 = 13,000 (Adv.) 13,000 (A) 2. Labour rate variance (S.R. A.R.) Actual Payment Hrs Skilled: (60 70) 2240 Semi-skilled: (40 50) 960 Unskilled: (30 = (A) = 9600 (A) = (F) 6,400 (A) 3. Labour efficiency variance (S.Q. A.Q.) S.R Skilled: (2,250 2,240) 60 Semi-skilled: (1, ) 40 Unskilled: (1,800 2,560) = 600 (F) = 15,600 (F) = 22,500 (A) 6,600 (A) 4. Labour mix variance (S. Ratio for Actual Mix Actual Ratio for Actual Mix) S.R. Skilled: (2,400 2,240) 60 = 9,600 (F) Semi-Skilled: (1, ) 40 = 19,200 (F) Unskilled: (1,920 2,560) 30 = 19,200 (A) 9,600 (F) 5. Labour yield variance (Standard Ratio for Standard Quantity Standard Ratio for Actual Quantity) S.R. Skilled: (2,250 2,400) 60 = 9000(A) Semi-Skilled: ( ) 40 = 3600(A) Unskilled: ( ) 30 = 3600(A) 16,200 (A) Question 18: The following data is given: Production (in units) Man hours to produce above Variable Overheads (in `) Particulars Budget Actual ,000 7,000 10,000 9,150 The standard time to produce one unit of the product is 20 hours. Required: Calculate variable overheads variances and give necessary journal entries to record transactions. Budget (400 FG) Standard (360 FG) Actual (360 FG) Hrs Rate Amount Hrs Rate Amount Hrs Rate Amount `) Labour 8, ,000 7, ,000 7, ,150 Variable Overhead Cost Variance: = SC AC = 9,000 9,150 = 150 (A) Variable Overhead Efficiency Variance: = (SH AH) SR = (7,200 7,000) 1.25 = 250 (F) Variable Overhead Exp. Variance: = (SR AR) Actual Working Hours = ( ) 7,000 = 400 (A)

13 Question 21: In Department A of a plant, the following data are submitted for the week ended 31st March 1993: Standard output for 40 hours per week 1,400 units Budgeted fixed overheads ` 1,400 Actual output 1,200 units Actual hours worked 32 hours Actual fixed overheads ` 1,500 Required: Prepare a statement of variances. Statement of Variances Fixed Overhead Volume Variance = (Recovered Overhead Budgeted Overhead) = 1,200 1,400 = 200 (A) Fixed Overhead Expenditure Variance = (Budgeted Overhead Actual Overhead) = 1,100 1,000 = 100 (A) Fixed Overhead Efficiency Variance = (Standard Hours Actual Hours) RR = ( ) 35 = 80 (F) Fixed Overhead Capacity Variance = (Actual Working Hours Budgeted Hours) Recovery Rate = (32 40)35 = (280) (A) Question 25: Budgeted no. of working days 24 Budgeted no. of hours per month 12,000 Fixed overhead rate ` 0.50 per hour Actual no. of working days in June 25

14 Compute the calendar variance Calendar Variance = (Actual days Budgeted days) Recovery Rate Per day = (25 24) 250 (W.N. 1) = = ` 250 (F) Working Notes: 1. Calculation of Recovery Rate 2. Budgeted hours per month = 12,000 hrs. 3. fixed overhead rate = 0.50/hr. 4. Budget fixed overhead (In a month) = ` 6, Recovery Rate per day = Total fixed Budget Oh 6,000 No. of Working days in a month 24 = `250/day Question 26: You are given the following data: STATEMENT OF FIXED OVERHEAD VARIANCES SL. NO. Particulars Basis Amount 1 Fixed overhead volume Recovered-Budgeted 1,000(A) variances ,000 2 Fixed Overhead expenditure Budgeted- Actual 500(A) variances 10,000 10,500 3 Fixed overhead cost variances Recovered-Actual 1,500(A) , Question 27: Fixed overhead as per budget, i.e. estimated ` 5,000

15 Budgeted hours, i.e. estimated Actual hours worked Actual fixed overhead Required: Compute the expenditure and volume variances. Statement of Fixed Overhead Variances Sl. No. Particulars Basis Amount 1. Fixed overhead Expenditure variance Budgeted Actual ` 5,000 ` 5, (A) 2. Fixed overhead volume variance Recovered Budgeted 1500 (A) ` 3,500 ` 5, Fixed overhead total variance Recovered Actual 2100 (A) ` 3,500 ` 5, Question 28: Budgeted Output Budgeted Hour Actual Hour Actual Output A B C D E F G A C D F G Budgeted overhead = `10,000 Actual overhead = ` 12,500. Required: Calculate the fixed overhead volume and Exp variance.

16 Statement of fixed overhead variances Sl. No. Particulars Basis Amount Fixed overhead expenditure variances Fixed overhead volume variances Budgeted Actual 10,000 12,500 Recovered Budgeted 8,800 10,000 2,500 (A) 1,200 (A) Note: If a company produces different products and every product does not consume equal budgeted hours, it is better to apportion high part of fixed OH to the product which has high budgeted hours. (The product here means actual output). In other words, we can say recovery should be on the basis of budgeted hours for actual outputs. If a company produces different products and every product consumes equal budgeted hours, overhead may be recovered either on the basis of actual output or budgeted hours for actual output Question30: A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fixed overheads are budgeted at ` 1,44,000 per month. The standard time required to manufacture one unit of product is 4 hours. In April 1998, the company worked 26 days of 840 machine hours per day and produced 5,305 units of output. The actual fixed overheads were `1,42,000. Required: Compute 1:- Efficiency variance 2:-Revised capacity variances 3:- Calendar variance 4:- Expense variance 5:- Volume variance

17 6:- Total fixed overheads variance Statement of Variances Sl. Particulars Basis Amount 1. Efficiency variance (S. Hr A.W.Hr) R.R = ( ,840) 6 3,720 (A) 2. Revised Capacity variance Total Cap. variance Calendar Variance 12,960 5,760 (W.N. 1) 18,720 (A) 3. Calendar variance (Actual days Budgeted days) Standard Rate/day = (26 25) 5,760 = 5,760 5,760 (F) 4. Expenses variance Budgeted Actual 1,44,000 1,42,000 2,000 (F) 5. Volume variance Recovered Budgeted 1,27,320 1,44,000 16,680 (A) 6. Total fixed overhead variance Recovered Actual 1,27,320 1,42,000 14,680 (A) Working Note1 Calculation of total Capacity Variance Total Capacity Variance = (Actual Working Hours Budgeted Hour) X Recovery Rate = (21,840 24,000) X 6 = 12,960 Adverse Question 31: The following figures are extracted from the books of a company: Particulars Budget Actual Output ( in units) Hours Overhead Cost-fixed Variable Number of days 6,000 3,000 1,200 6, ,500 3,300 1,250 6, Required: Compute and analyse the overhead variances.

18 Note: Assume 8 Working Hour Per day, Budgeted Hours = 20 8, Actual Hour = Sl. No. Particulars Basis Amount 1. Fixed OH Volume Variances Recoverd Budgeted 1,300 1, (F) Fixed OH Expenditure Variances Fixed OH Cost Variance Budgeted Actual 1,200 1,250 Recovered Actual 1,300 1, (A) 50 (F) 4. Fixed OH Efficiency Variance (S. Hrs A.W.Hrs) Recovery Rate = (3,250 3,300) (A) 5 Fixed OH Capacity Variance (A.W.Hrs Bud. Hrs) Recovery Rate = (3,300 3,000) (F) 6. Fixed OH Calendar Variance (Actual Work Days Budgeted days) R.R./day 1,200 = (27 25) (F) 7. Fixed OH Balanced Capacity Variance Total Capacity Variance Calendar Variance = 120 Fav. 96 Fav. 24 (F) 8. Variable OH Variable Standard variable OH for Actual Output Actual variable OH Actual Output 6,000 = 6,500 6,650 6,000 = 6,500 6, (A)

19 Question 32: The following information was obtained from the records of a manufacturing unit using Standard Costing System: Production Standard 4,000 units Actual 3,800 units Working days Fixed overhead Variable overhead 20 40,000 12,000 Required: Calculate the following overhead variances: Variance overhead variance (b) Fixed overhead variance ,000 12,000 Expenditure Variance (b) Volume Variance (c) Efficiency Variance (iv) Calendar variance. Sl. No. Statement of Variances Particulars Basis Amount

20 1. Variable OH Variances Standard Variable OH for actual output Actual variable OH for actual output 12, ,800 12,000 = 11,400 12, (A) 2. Fixed OH Variance Recovered Actual 38,000 39,000 = 1,000 1,000 (A) 3. Fixed OH Expenditure Variance Budget Actual 40,000 39,000 1,000 (F) 4. Fixed OH Volume Variance Recovered Budged 38,000 40,000 2,000 (A) 5. Fixed OH Efficiency Variance (Standard Working Hr Actual Working Hour) R.R./hr. ( ) ` 250/hr. 4,000 (A) 6. Fixed OH Calendar Variance (Actual Working days Budgeted Working days) R.R. per day 40,000 (21 20) 2 2,000 (F) Question 33: A Cost Accountant of a company was given the following information regarding the overheads for February 1987: Overheads cost variance ` 1,400 adverse. Overheads volume variance 1,000 adverse. Budgeted hours for February ,200 hours. Budgeted overheads for February 1987 ` 6,000. Actual rate of recovery of overheads ` 8 per hour. Required: To Assist the cost accountant in computing the following for February :- Overheads expenditure variance 2:- Actual overheads incurred 3:- Actual hours for actual production 4:- Overheads capacity variance 5:- Overheads efficiency variance 6:- Standard hours for actual production. Statement of Required Information Sl. No. Particulars Basis Amount

21 1. Overhead Expenditure Variance W.N A. 2. Actual Overhead incurred W.N. 2 6, Actual Hours for Actual production Overheads Capacity Variance Actual Overhead Actual Rate (Actual hrs worked) Recvoery Rate 800 hrs. 5. Overheads Efficiency Variance 6,000 (800 1,200) 1,200 2,000 (A) 6. Standard hours for actual production (Standard Hr. Act. worked Hr.) R.R. (1, ) 5 1,000 (F) W.N. 3 1,000 hrs Question 34: The Dearborn Company manufactures product X in standard batches of 100 units. A standard cost system is in use. The standard costs for a batch are as follows: Raw materials Direct labour Variable overhead 60 ` 4.50/kg 36 `8.25/hour 36 `4.75/hour Standard output per month ` 270 ` 297 `` 171 ` ,000 units

22 Production for April 2005 amounted to 210 batches. The relevant statistics follows The management has noted that actual costs per batch deviate somewhat from standard costs per batch. Required: Prepare a statement which will contain a detailed explanation of the difference between the actual costs and standard costs Data for Resource Variance Particulars Budgeted (1 FG) Standard (21,000) Actual (21,000) Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount Mat (kg) Labour (hrs.) V OH (hours) ,600 7,560 7, ,700 62,370 35,910 13,000 7,920 7, ,100 66,924 36,000 Sl. No. Statement of Variances Particulars Basis Amount

23 1. Material Price Variance ( ) 13,000 (S.P. A.P.) A.Q. 2,600 (A) 2. Material Usage Variance (S.Q. A.Q.) S.P. (1,26,00 13,000) ,800 (A) 3. Material Cost Variance S.C. A.C. 56,700 61,100 4,400 (A) 4. Labour Rate Variance (S.R. A.R.) Actual Working Hours ( ) ,584 (A) 5. Labour Efficiency Variance (Standard Hrs. Actual Working Hours). S.R. (7,560 7,920) ,970 (A) 6. Labour Cost Variance S.C. A.C. 62,370 66,924 4,554 (A) Variable OH Expenditure Variance Variable OH Efficiency Variance Variable OH Cost Variance (S.R. A.R.) Actual Working Hours ( ) 7,920 (Standard Hrs. Actual Working Hours) S.R. (7,560 7,920) S.C. A.C. 35,910 36,000 1,626 (F) 1,636 (A) 10 (A) Question 35: A Ltd., operates a system of standard costs. Following information is available: Actual: Materials Consumed 1,89,000 (3,600 units at ` per unit) Direct Wages 22,100 Fixed Expenses 1,88,000 Variable Expenses 62,000 Output during the period was 3,500 units of finished product. For the above period, the standard production capacity was 4,800 units and the break up of standard cost per unit was as under: Particulars Amount Materials (one 50 per unit) Direct wages Fixed expenses Variable expenses Total standard cost per unit ` The standard wages per unit is based on 9,600 hours for the above period at a rate of `3.00 per hour. 6,400 hours were actually worked during the above period, and in addition, wages for 400 hours were

24 paid to compensate for idle time due to breakdown of a machine and overall wage rate was ` 3.25 per hour. Required: Compute the following variances with appropriate workings: 1:- Direct Material Cost Variance 2:- Material Usage Variance 3:- Wage Rate Variance 4:- Idle Time Variance 5:- Fixed Expenses Expenditure Variance 6:- Fixed Expenses Capacity Variance 7:- Total Cost Variance. 8:- Material Price Variance 9:- Direct Labour Cost Variance 10:- Labour Efficiency Variance 11:- Variable Expenses Variance 12:- Fixed Expenses Volume Variance 13:- Fixed Expenses Efficiency Variance Particulars Budgeted (1 Unit) Standard (3,500) Actual (3,500) Mat (unit) Labour (hrs.) V OH (hrs.) Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount , ,75,000 3, ,89, , ,000 6, , , ,000 6, ,000

25 Statement of Variances 1. Material Cost Variance S.C. A.C. 1,75,000 1,80, (A) 2. Material price Variance (S.R. A.R>) X AQ ( ) X (A) 3. Material usage Variance (S.Q. A.Q.) X S.R. (3,500 3,600) X 50 5,000 (A) 4. Labour Cost Variacne S.C. A.C. 21, ,100 (A) 5. Wage Rate Variance (S.R. A.R>) X A.P. Hrs (3 3.25) X 6,800 1,700 (A) 6. Labour Efficiency Variance (S.Hrs A.W. Hrs) X S.R (7,000 6,400) X 3 1,800 (F) Idle time Variance Variable Expenses Variances Idle Hrs. X S.R. (400 X 3) S.C> -A.C. 70,000 62,000 1,200 (A) 8000 (F) 9 10 Fix OH Expenditure Variance FIx OH Volumne Variance Budget Actual 1,92,000 1,88,000 Recovered Budget 1,40,000 1,92, (F) 52,000(A) Fixed Exp.(OH) Capacity Variance Fixed Expenses(OH) Efficiency Variance Total Cost Variance (A. W. HRs Bud.. Hrs) X R.R. (6,400 9,600) X 20 (S.Hrs-A.W.Hrs)X R.R. (7,000 6,400) X 20 64,000 (A) 12,000(F) Question 36: Z Ltd uses standard costing system in manufacturing of its single product M. The standard cost per unit of M is as follows: ` Direct materials: 2 ` 6 per m Direct labour: 1 ` 4.40 per hour 4.40 Variable overhead: 1 ` 3 per hour During July, 1993, 6000 units of M were produced and the related data are as under: Direct material acquired `5.70 per m. Material consumed m. `

26 Direct labour -? `? per hour 27,950 Variable overheads incurred 20,475 The variable overheads efficiency variance is ` 1,500 adverse. Variable overheads are based on direct labour hours. There was no stock of raw material in the beginning. Required: Compute the missing figures and work out all the relevant variance. Budgeted (1 FG) Standard (6,000) Actual Mat (Meter) Labour (hrs.) V OH (hrs.) Qty Rate Amount Qty. 12,000 6,000 6,000 Rate Amount 72,000 26,400 18,000 Qty. 12,670 6,500 (W.N. 1) 6,500 (W.N. 1) Rate Amount 72,215 27,950 20,475 Statement of Variances 1. Material Price Variance (S.R>- A.R>) X A.Q. (6 5.70) X 12,670 3,801 (F) Labour Rate Variance Variable OH Expenditure Variance Material Usage Variance Labour Efficiency Variance VOH Efficiency Variance Material Cost Variance Labour Cost Variance Variable OH Cost Variance (S.R> - A.R> ) X A.Pay Hr ( ) X 6,500 (S.R> -A.R.) X A.W. Hr ( ) X 6,500 (S.Q. A.Q>) X S.R. (12,000 12,670) X 6 (S. HR A.W.Hr ) X S.R. (6,000 6,500) X 4.40 (S. Hr A.W. Hr ) X S.R. (6,000 6,500) X3 S.C. A.C. 72,000 72,215 S.C. A.C. 26,400 27, 950 S.C A.C. 18,000 20, (F) 975 (A) 4,020(A) 2,200(A) 1,500(A) 215(A) 1,550(A) 2,475(A) Working Notes: 1. Calculation of Actual Working Hours Variable OH Efficiency variable = (S. Hr. A.W.Hr) S.R. 1,500 = (6,000 A.W.Hr) = 6,000 A.W.Hr Actual working hour = 6, = 6,500 Hrs Question 37:- Mr M provide the following information relating to 1,000 units of product ZED during the

27 month of April, 1993: Standard price per kg of raw-material Actual total direct material cost ` 10,000 Standard direct labour hours 1,600 Actual direct labour hours 1,800 Total standard direct labour cost ` 8,000 Standard variable overhead per direct labour hour ` 1 Standard variable overhead per unit of ZED ` 1.60 Total standard variable overhead `1,600 Actual total variable overheads `1,620 The material usage variance is ` 600 adverse and the overall cost variance per unit of ZED is ` 0.07 adverse as compared to the total standard cost per unit of ZED of ` 21. Required: Compute the following Standard quantity of raw material per unit of ZED. Standard direct labour rate per hour. Standard direct material cost per unit of ZED. Standard direct labour cost per unit of ZED. Standard total material cost for the output. Actual total direct labour cost for the output. Material price variance. Labour rate variance. Labour efficiency variance. Variable overhead expenditure variance. Variable overheads efficiency variance. Note: Key calculation should form part of the answer. - `3 Statement of Missing Variances = 6,500 Hr. S.No. Particulars Basis Amount A Standard Quantity of Raw Material/unit 3,800/1.00 in (W.N.1) 3.8 Kg B Standard Direct Labour Rate/Hour 8,000/1,600(W.N.1) 5.00 C Standard Direct Material Cost/unit 11,400/1,000 (W.N. 1) D Standard Direct Labour Cost/unit of Z.E.D. 8,000/1,000(W.N. 1) 8 E Standard total material cost for the output W.N.-1 11,400 F Actual Total Direct labour cost for output W.N.- 1 9,450 G Material Price Variance (S.R A.R.) X AQ 2000(F) (3 2.5 ) X 4000 H LAbour Rate Variance (S.R. -A.R.) X A. Day. Hrs 450(A) ( ) X 1,800 I Labour efficiency variance S. Hrs A.W. Hrs ) X S.R. 1,000(A) (1,600-1,800) X5 J Varaicne OH Expenditure Variance (S.R. A.R.) X A. W. Hrs. 180(F)

28 ( ) X 1800 K Variable OH Efficiency variance (S. Hrs A.W. Hrs) X S.R ) X1 200(A) Working Notes: 1. Data for Resource Variance Standard/Budget (1,000 FG) Material Labour hours Variable overhead hours Qty. 3,800 1,600 1,600 Rate Amount ,400 8,000 1,600 Actual (1,000 FG) Cost per Unit Qty. Rate Amount 11.4 (B.f.) ,000 (W.N. 2) 1,800 1, ,000 9,450 1,620 Cost per unit (B.f ) Material Usage Variance= (S.Q. A.Q.) S.R. 600 = (3,800 A.Q.) = 3,800 A.Q. A.Q. = 3, = 4,000 kg 3. Over all cost variance = S.C. A.C = 21 A.C. Actual cost = = ` (W.N.3) Question 39: K Limited uses standard costs and flexible budgets for control purposes. The following information is given: 1. Standard and budgeted data The standard material allowed per unit is 4 kg at a standard price of ` 0.75 per kg. Budgeted direct labour hours for a four week period were 80,000 hours at a budgeted cost of ` 1,52,000. Budgeted variable production overhead for 80,000 hours was ` 96, Details for four-week period ended 29th April 1988 were: Variances: Incurred: Direct wages 1,63,800 Direct wages rate, `0.20 per hour adverse. ` Direct Materials price (Calculated on purchases at time of receipt at Re per kilogram) ` 9,000 favourable. Direct material usage ` 1,500 adverse. Variable production overhead ` 2,200 favourable. Variable production overhead efficiency ` 2,400 adverse, Production 38,000 units. There were no stocks at beginning of period, but there were 26,000 kg of direct materials in stock at 29th April 1988.

29 Required: State for the period The number of kilograms of direct material purchased. The number of kilograms of direct material used above the standard allowed. The variable production overhead expenditure variance. The actual hours worked. The number of standard hours allowed for the production achieved. Material Labour Variable overhead Data for Variance Budgeted Standard Actual Qty. Rate Amount Qty. Rate Amount 1,78,000 76,000 76, Statement of Required Information 1,33,500 1,44,400 91,200 Qty. Rate Amount 1,54,000 78,000 78, (``) 1,07,800 1,63,800 89,000 Sl. Particulars Basis Amount (W.N. 1) 1,80,000 kg (W.N. 3) 2,000 kg Number of kilogram of direct material purchases The number of kilograms of direct material used above the standard allowed The variable production overhead expenditure variance The Actual Hours Worked The number of standard hours allowed for the production achieved Variable overhead cost Variance = SC AC 2,200 = 91,200 78,000 AR 9,12,000 2,200 78,000 Working Notes: 1. Calculation of Actual Hours (W.N. 4) (W.N. 1) (W.N. 5) 4,600 (F) 78,000 Hrs. 76,000 Hrs.

30 Question 41: On 1st April, 1998, ZED company began the manufacture of a new electronic gadget. The company installed a standard costing system to account for manufacturing costs. The standard costs for a unit of the product are as under:

31 Direct Material (3 kg at ` 5 per kg) Direct Labour (0.5 hour at ` 20 per hour) Manufacturing Overhead (75% of direct labour cost) Total Cost The following data was obtained from Zed Company s record for April 1998 Particulars Debit Credit Sales ` 1,25,000 Sundry Creditor (For purchase of direct materials in April 1998) `` 68,250 Direct Material Price Variance 3,250 Direct Material Usage Variance 2,500 Direct Labour Rate Variance 1,900 Direct Labour Efficiency Variance 2,000 The actual production in April 1998 was 4,000 units of the gadget, and the actual sales for the month was 2,500 units. The amount shown above for direct materials price variance applies to materials purchased during April There was no opening stock of raw materials on 1st April, Required: Calculate for April 1998 the following: (i) Standard direct labour hours allowed for the actual output achieved. (ii) Actual direct labour hours worked. (iii) Actual direct labour rate. (iv) Standard quantity of direct materials allowed (in kg) (v) Actual quantity of direct materials used (in kg) (vi) Actual quantity of direct materials purchased (in kg) (vii) Actual direct materials price per kg Question 42: A Ltd. has a manufacturing division which makes a product to which the following details relate Particulars Materials Direct labour Variable overheads 5 kgs at ` 2 12 hours at ` 2 12 hours at ` 1 Per unit ` 10 Relevant fixed overhead are budgeted at ` 10,000 per month and planned output is 2,000 units per month. The selling price is ` 55 per unit. An incentive scheme is in operation in the division concerned, whereby employees are paid a bonus of 15% of the standard cost of materials saved and 50% of direct labour time saved values at standard direct labour hour rate. During a recent month when output was 1,800 units, the following actual results were recorded: `24 `12

32 Particulars Amount Direct material used (8,500 kg) Direct wages (20,000 hours) Variable Overhead Fixed overhead Net profit 17,200 42,000 22,000 9,800 91,000 4,000 Sales 95,000 Required: (a) Calculate the variance, which occurred during the month. (b) Calculate the total bonus payments to employees in the division. Calculation of Different Variances Sl. Particulars Basis Amount 1. Material Price Variance (S.R. A.R.) A.Q. ( ) 8, (A) 2. Material Usage Variance (S.Q. A.Q.) S.R. (9,000 8,500) 2 3. Material Cost Variance S.C. A.C. (18,000 17,200) 4. Labour Rate Variance (S.R. A.R.) Actual Payment Hours (2 2.1) 20, Labour Efficiency Variance (S.Hr Actual Working Hours) S.R. (21,600 20,000) 2 6. Labour Cost Variance S.C. A.C. 43,200 42, V OH Expenditure variance (S.R. A.R.) Actual Working Hours (1 1.1) 20, Variable OH Efficiency variance (Standard Working Hours Actual Working Hours) S.R. (21,600 20,000) 1 1,000 (F) 800 (F) 2,000 (A) 3,200 (F) 1,200 (F) 2,000 (A) 1,600 (F) 9. Variable overhead cost variance 10. Fixed overhead expenditure variance 11. Fixed overhead volume variance 12. Fixed overhead cost variance S.C. A.C. (21,600 22,000) Budgeted Actual (10,000 9,800) Recovered Budgeted (9,000 10,000) Recovered Actual (9,000 9,800) 400 (A) 200 (F) 1,000 (A) 800 (A)

33 (i) (ii) (b) Statement of Bonus 15% of S.C. of Material saved (S.Q. A.Q) S.C. 15% (9,000 8,500) 2 15% 50% of S.C. of lab. Hrs. saved 50% 2 (21,600 20,000) Particulars Amount 150 1,600 Total Bonus payable 1,750 Working Notes: Data for Resource Variances Budgeted Output Recovery Rate Budgeted fixed-overhead Actual Hrs. 2,000 units ` 5 / unit 10,000 20,000 or or 24,000 hrs. `` / hr. Standard hrs./units Recovered Actual 21,600 Hrs or 1,800 units 9,000 (21, ) 9, Question43: A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires12 hours. In April, 2004, of 22 effective working days of 8 hours a day, 1,200 units of X and 800 units of Y were produced. The company employs 100 workers in production department to produce X and Y. The budgeted labour hours are 1,86,000 for the year. Required: Calculate Capacity, Activity and Efficiency ratio and establish their relationship.

34 Question 45: The following is the information provided by Tulsian Ltd. Product Budgeted Sales Quantity Units A B Budgeted Selling Price per unit Standard Cost Per unit Required: 1. Calculate all the sales variances (a) on sales value basis (b) on sales margin value basis 2. Reconcile the standard profit with actual profit. Budgeted Sale Product Qty. Rate Amount 15 4 Actual Sales Quantity Units Data for Sales Variance Standard Ratio for actual mix Actual Selling Price per unit 25 5 Actual Sale Actual Cost Per unit (` 16 5 Qty. Rate Amount

35 A B , , , ,430 Statement of Sales Variances Sl. Particulars Basis Amount Sales Value Variance Sales Price Variance Sales Volume Variance Sales Mix Variance Sales Yield Variance Budgeted Sales Actual Sales (1,600 1,430) (B.S.P. A.S.P.) A.Q. A : (20 25) 44 = 220 (F) B : (10 5) 66 = 330 (A) (B.Q. A.Q) B.S.P. A : (60 44) 20 = 320 (A) B : (40 66) 10 = 260 (F) (S.R. for Actual Mix Actual Ratio for Act Mix) B.S.P. A : (66 44) 20 = 440 (A) B : (44 66) 10 = 220 (F) (S.R. for Bud. Mix Standard Ratio for T.A. Mix.) B.S.P. A : (60 66) 20 = 120 (F) B : (40 44) 10 = 40 (F) 170 (A) 110 (A) 60 (A) 220 (A) 160 (F) Budgeted profit Adjust Sales Variance: Sales price variance Sales Volume Variance Adjust cost variances: ( ) Reconciliation Statement (A) 60 (A) 26 (F) Actual profit 396 Working Notes: 1. Statement of Profit Sales Value A: B: Sales Value A: B: Less: Cost A: Budget 1, ,600 (1,060) 1,600 (1,060) Sales Value A: B: 66 5 Sales Value A: B: 66 5 Less: Cost A: Actual 1, ,430 (1,034) 1,430 (1,034) Sales Value 540 Sales Value 396 Subject to Checking Question 47: Stand Cost Corporation produces three products: A, B and C. The master budget called for the sale

36 of 10,000 units of A at ` units of B at ` 15 and 8,000 units of C at `9. In addition, the standard variable cost for each product was ` 7 for A, `` 9 for B and ` 6 for C. In fact, the firm actually produced and sold 11,000 units of A at ` 11.50, 5,000 units of B at ` 15.1and 9,000 units of C at ` 8.5.The firm uses two input to produce each of the products X and Y. The standard price per unit of material X is ` 2 and for a unit of material Y is ` 1. The materials budgeted to be used for each product were: Products X Units A 2 B 4 C 1 Materials Y Units The firm actually used 54,000 units of X at a cost of ` 1,09,620 and 72,000 units of Y at a cost of ` 73,000. Required: Determine the mix, quantity and rate variances for sales as well as the yield, mix and price variance for materials. Product A B C Sales Variances (Sale Value Method) Budgeted Sales Qty. Units Rate Amount Oty. Units Rate Actual Sales Amount ` Actual Quantity Budgeted Price 10,000 6,000 8, ,20,000 90,000 72,000 11,000 5,000 9, ,26,500 75,500 76,950 1,32,000 75,000 81,000 24,000 2,82,000 25,000 2,78,950 2,88,000

37 Alternative Solution (Sales Margin Method) Basic Calculation Budgeted Margin Actual Margin Actual Quantity X Product A B C Qty. Units 10,000 6,000 8,000 Rate Amount ,000 36,000 24,000 Qty. Units 11,000 5,000 9,000 Rate Amount (``) 49,500 30,500 22,950 Budgeted Price (``) 55,000 30,000 27,000 24,000 1,10,000 25,000 1,02,950 1,12,000

38 Material Variances: Basic Calculations Standard and actual costs of material for actual output i.e. 11,000 untis of A, 5,000 units of B and 9,000 untis of C and standard cost of actual input material. Material Standard Cost Actual Cost Actual quantity Standard price X Y Qty Units 51,000 74,000 Rate 2 1 Amount 1,02,000 74,000 Qty. Units 54,000 72,000 Amount 1,09,620 73,000 Rate Amount 1,08,000 72,000 1,25,000 1,76,000 1,26,000 1,82,620 1,80, Question 50: File and Smile Associates undertake to prepare income tax returns for individual for a fee. Their advice to their clients is to pay the proper tax and relax. In order to arrive at the proper scales of fees and assess their own performance, they have a good system. They use the weighted average method and actual costs for financial reporting purposes. However, for internal reporting they use a standard cost system. The standards on equivalent performance have been established as follows: Labour per return Overhead per return 5 ` 40 per hour 5 ` 20 per hour For March 1988 performance, budgeted overhead is ` 98,000 for the standard labour hours allowed. The following additional information pertains to the month of March 1988.

39 Required: Compute (a) For each cost element equivalent units of performance and the actual cost per equivalent unit. (b) Actual cost of return in process on March 31. (c) The standard cost per return and (d) The total labour rate and labour efficiency variance as well as total overhead volume and overhead budget variances. Current Opening Cost (a) Statement of Cost (Weighted Avg.) Labour `1,78,000 ` 12,000 Overhead ` 90,000 `5,000 Total ` 1,90,000 ` 95,000 Qty. (WN1) (B) 1,000 1,000 Rate (` p.u) (A) (B) ` 190 ` 95 (a) Calculation of Actual cost of closing W.I.P. Labour ( ) Overhead (95 100) Standard Cost (b) Labour: 5 Hrs X Overhad: 5 hhr X (d) Statement of Variances 19,000 9,500 28,500 Sl. No. Particulars Basis Figures Labour Rate Variance Labour Efficiency Variance Overhead Volume Variance Overhead Budget/Expenditure Variance (S.R. A.R.) Actual Payment Hrs 1,78, ,000 4,000 (S.Hr A.W. Hr) S.R. (4,750 4,000) 40 Recovered overhead Budget overhead 95,000 98,000 Budget overhead Actual overhead 98,000 90,000 18,000 (A) 30,000 (A) 3,000 (A) 8,000 (F) Opening W.I.P. Units Started Working Notes: 1. Statement of Equivalent Production (Weighted Avg. Method) Particulars Labour Overhead 200 Transferred Closing W.I.P. (80%) ,025 1,

40 Opening W.I.P. (25 k) Units Started Statement of Equivalent Production (FIFO) for Variance Analysis Labour ,025 Opening W.I.P. Current Transferred Closing W.I.P. (80%) , Overhead Question 51: (Standard Process Costing including Reconciliation Equivalent production FIFO method): A processing company uses Standard Process Costing method. The standard process cost card is as follows: Stocks: Opening W.I.P. 250 kg Degree of completion: Material-100% Labour and overhead 60%. Closing W.I.P 450 kgs. Degree of completion: Material-100%, Labour and overheads 20%. Finished Stock-1,200 kgs. The company uses FIFO method for valuation of stocks. Required:

41 Computation of cost variances in as much detail as possible and process Cost Reconciliation statement. Statement of Variances S.NO. Particulars Basis ` 1 Material Price Variance (S.P. A.P. ) X A.Q. ( ) X Material usage variance (S.Q. A.Q.) X S.R. ( ) X 10 3 Material cost variance S.C.- A.C. 28,000 32,000 4 Labour Rate variance (S.R. A.R.) X A.pay. HRs ( 20 20,606) X Labour Efficiency variance (S. Hrs- a.w.hour) X S.R. (3,420 3,300) X 20 6 Labour cost variance S.C. A.C. 68,400 68,000 7 Fixed overhead volume variance Recovered Budget 1,02,600 90,000 8 Fixed overhead efficiency variance (S. Hr. A.W. Hr.) X S.R. (3,420-3,300) X30 9 Fixed overhead capacity variance (A.W> Hr Bud. Hr) X R.R. (3,300 3,000) X Fixed overhead expense variance Budget Actual 90, Fixed OH Recovered Actual Cost variance 1,02,600 88,000 Working Note 1 OP. W.I.P. (100%, 60%) 250 Introduced 1,400 Opening 250 Current 950 Transferred 1,200 Closing W.I.P. (80%) (A) 1000(A) 4000(A) 2000(A) 2400(F) 400(F) 12,600 (F) 3600 (F) 9000 (F) 2000 (F) 14,600 (F) Statement of Equivalent Production (FIFO) Material Labour & Overhead ,650 1,650 1,400 (Actual output for material) 90 1,140 (Actual output for labour) Working Note 2 Material (kg) (1,400) Labour (1,140) Working Note 3 Standard Qty. Rate Amount 2,800 3,420 Data for Resource Variance ,000 68,400 Actual Qty. Rate Amount 2,900 3, ,000 68,000

42 Question 52: A single product company has prepared the following cost sheet based on 8,000 units of output per month: Direct Materials 1.5 ` 24 per kg Direct Labour 3 ` 4 per hr Factory Overheads Total The flexible budget for factory overheads is as under: ` The actual results for the month of October 2002 are given below: Direct Materials Purchased and consumed were 11,224 kg at ` 2,66,570. Direct Labour hours worked were 22,400 and Direct Wages paid amounted to ` 96,320. Factory overheads incurred amounted to ` 96,440 out of which the variable overhead is ` 2.60 per Direct Labour hour worked. Actual output is 7,620 units. Work-in-process: Opening WIP Closing WIP 300 units Materials 100% complete Labour and Overheads 60% complete 200 units Materials 50% complete Labour and Overhead 40% complete

43 Required: Analyze the variances Statement of Variances Sl. No. Particulars Basis Figures 1. Material Price Variance (S.P. A.P.) A.Q. ( ) 11,224 2,806 (F) 2. Material Usage Variance (S.Q. A.Q.) S.P. (11,130 11,224) 24 2,256 (A) 3. Material Cost Variance S.C. A.C. 2,67,120 2,66, (F) 4. Variable Overhead Expenditure Variance (S.R. A.R.) A.W.Hr ( ) 22,400 4,480 (A) 5. Variable Overhead Efficiency Variance (S.Hr A.W.Hr) S.R. (22,560 22,400) (F) 6. Fixed overhead expenditure variance Budget Actual 38,400 38, (F) 7. Fixed overhead volume variance Recovered Budget 36,096 38,200 2,304 (A) 8. Fixed overhead efficiency variance (S.Hr A.W.Hr) S.R. (22,560 22,400) (F) 9. Fixed overhead capacity variance (Bud. Hr. A.W.Hr) S.R. (24,000 22,400) 1.6 2,560 (A) 10. Labour rate variance (S.R. A.R.) A.Pay. Hrs (4 4.3) 22,400 6,720 (A) 11. Labour efficiency variance (S.Hr A.W.Hr) S.R. (22,560 22,400) (F) Working Note 1 Calculation of Variable Overhead Rate per unit Change in overhead 92,400 81,000 10,800 Change in output 7,500 6,000 1,500 Working Note 2 Statement of Equivalent Production Particulars Material Lab OH

44 Opening W.I.P. (100%, 60%) Introduced (B.f ) 300 7,520 Opening Current Transferred Closing W.I.P. (50%, 40%) 300 7,320 7, , , ,820 7,820 7,420 7,520 Working Note 3 Data for Resource Variance Particulars Standard Actual Material Labour Variable overhead Qty. 7, = 11,130 7,520 3 = 22,560 7,520 3 = 22,560 Rate = Amount 2,67,120 90,240 54,144 Qty. 11,224 22,400 22,400 Rate Amount 2,66,570 96,320 58, Question 53: Standard cost sheet per unit of output is as under Direct material 3 ` 2.15 Direct labour: Department A 2 ` 1.75 Department B 4 ` 1.50 Overheads: Department A 2 ` 0.50 Department B 4 ` 1.00 Total Transactions for the period are as under: Materials purchased and consumed: `6.45 ` 9.50 ` 5.00 `20.95

45 8,600 `2.50 each Labour Time Spent Department A. 5,200 hours Department B. 12,000 hours There is no change in labour rates: Actual factory overheads are: Department A` 3,000 Department B. ` 12,500 Units produced: Department A. 2,800 Department B. 2,800 Budgeted overheads: Department A. ` 3,000 Department B. ` 12,000 Pass the necessary Journal Entries to record the above transactions under single plan. Required: Show the Standard Cost Card. (b) Show the journal entries to record the transactions and disposal of the variances Narrations are not required for journal entries). Show (i) The Material Control Account (ii) The Work-in-progress Control Account. Journal Entry (Under Single Plan) in Department A Particulars 1. Material Control A/C Dr (S.R. A.Q) Material Price Variance A/c Dr (S.R. A.R.) A.Q. To creditors A/c (Being Material purchased) Amount (``) 18,490 3,010 Amount 21, Creditors A/c Dr To Bank 3. W.I.P. Control A/c Dr (S.Q. A.R.) Material Usage Variance A/c. (S.Q. A.Q.) A.R. To Material control A/c. (A.Q. A.R.) (Being goods issued to production) 21,500 18, ,500 18, Wages Control A/c. Dr (S.R. A.W.Hr) To wages payable A/c. (S.R. A.P.Hr) (Being labour expenses due) 5. Wages payable A/c. Dr To Bank A/c 6. W.I.P. control A/c Dr. To wages control A/c To labour Efficiency variance A/c 7. W.I.P. Control A/c Dr Overhead cost variance A/c Dr To Bank 9,100 9,100 9,800 9,100 9,100 9, , ,000

46 8. Department B A/c Dr To W.I.P. Control A/c 30,660 (Being balance of W.I.P. Control A/c of department A transferred to department B) In Department B Journal Entry 30,660 Particulars Amount Amount 1. W.I.P. Control A/c Dr To Department A A/c. 2. Wages Control A/c Dr Labour Rate variance A/c Dr To wages payable A/c 3. Wages Payable A/c Dr To Bank 4. W.I.P. control A/c Dr Labour Efficiency variance A/c Dr To wages control A/c 30,660 18,000 Nil 18,000 16,800 1,200 30,660 18,000 18,000 18, W.I.P. control A/c Dr Overhead cost variance A/c Dr To Bank 11,200 1,300 12, RECONCILIATION BASED QUESTION Question 56: The budget output of a single product manufacturing company for was 5,000 units. The financial results in respect of the actual out put of 4,800 units achieved during the year were as under: Direct material Direct wages Variable overheads Fixed overheads Profit Sales Particulars Amount 29,700 44,700 72,750 39,000 36,600 2,22,750 The standard wage rate is `4.50 per hour and the standard variable overhead rate is `7.50 per hour. The cost accounts recorded the following variances for the year: Variances Favourable Adverse

47 Material Price Material usage Wage Rate Labour Efficiency Variable Overhead Expenses Variable Overhead Efficiency Fixed Overhead Expense Selling Price 750 3,000 6, ,250 3,750 1,500 Required: Prepare a statement showing the original budget. Prepare the standard product cost sheet per unit. Prepare a statement showing the reconciliation of originally budgeted profit and the actual profit. Statement showing standard cost sheet per unit and Original Budget Particulars Material (See WN 1) Labour (See WN 2) Variable overhead (See WN 3) Fixed overhead (See WN 4) Standard cost per unit Original Budget 5,000 units 30,000 45,000 75,000 37,500 Total Cost Profit ,87,500 37,500 Selling price (See WN 5) 45 2,25,000 Budgeted Profit Sales Variance: Price Variance Volume Variance: Statement of Reconciliation (Marginal) Particulars (B.Q. A.Q.) (F.C. + Pro. P.U.) 200 ( ) Cost Variances: Material Cost Variance: Material price variance 300 (A) Material usage variance 600 (A) Labour Cost Variance: Wage rate variance 750 (F) Labour efficiency variance 2,250 (A) Variable Overhead Cost Variance: Variable overhead expenses 3,000 (F) Variable overhead efficiency variance 3750 (A) Fixed Overhead Expenditure Variance Fixed Overhead Volume Variance Amount 37,500 6,750 (F) 3,000 (A) 900 (A) 1,500 (A) 750 (A) 1,500 (A) N.A.

48 Actual profit 36,600

49 Quantity Selling Price per unit Variable cost per unit (Material + Labour + Overhead) Contribution per unit Total Contribution Less: Fixed Cost Budget 5, ,000 37,500 Actual 4, ,000 37,500 Profit 37,500 34, Question 57: The Summarised results of a company for the two years ended December 31st are given below for 2 years: (` in lakh) (` in lakh) Sales Direct Material Direct wages Variable Overheads Fixed Overheads Profit As a result of re-organization of production methods and extensive campaigning, the company was able to secure an increase in the selling Price by 10% during year 2 as compared to the previous year. In year 1, the company consumed 1,20,000 kg. of raw materials and used 24,00,000 hours of direct labour. In year 2, the corresponding figures were 1,35,000 kg. of raw material and 26,00,000 hours of direct labour. Use the information given for the year 1 as the base year information to analyse the results of year 2 and to show, in a form suitable to the management, the amount each factor has contributed by way of price, usage, and volume to the change in profit in year 2. Let Selling Price be `100 per unit for I year. Then Sales Sales Price Quantity Sold IInd year 7,70,00, ,00,000 Reconciliation Statement Ist Year 6,00,00, ,00,000

50 Particulars Basis ` in lakh Budgeted Profit 40 Sales Variance Price Variance = (B.S.P. A.S.P.) A. Qty = ( ) 7,00,000 Volume Variance = (B.Q. A.Q.) Budgeted Price p.u. = (6,00,000 7,00,000) (F) 6.66 (F) Cost Variance Fixed Overhead Volume Variance Recovered Overhead Budgeted Overhead ( ) Fixed Overhead Expenditure Variance (Budgeted Overhead Actual Overhead) Material Price Variance = (S.R. A.R.) A.Q. Material Usage Variance = (S.Q. A.Q.) S.R. Labour Rate Variance = (S.R. A.R.) A.P. Hr. Labour Efficiency Variance = (S.Hr A. Hr) S.R. Variable Overhead Expenditure Variance = (S.R. A.R.) A.W. Hr Variable Overhead Efficiency Variance = (S.Hr A. Hr) S.R (F) 70 (A) 13.5 (F) 12.5 (F) 7 (A) 10 (F) 4 (A) 5 (F) Actual Profit 90 Working Notes: 1. Data for Resource Variance Budget Standard Actual Material Qty. Rate (` in lakh) Material Labour Variable Overhead 1,20,000 24,00,000 24,00, Amount Qty. 1,40,000 28,00,000 28,00,000 Rate (` in lakh) Amount Qty. 1,35,000 26,00,000 26,00,000 Rate (` in lakh) Amount

51 Question 63: The Britten Co. Ltd manufactures a variety of products of basically similar composition. Subjecting the various raw materials to a number of standardised operations each major series of operations being carried out in a different department carries out Production. All products are subjected to the same initial processing which is carried out in departments A, B and C; the order and extent of further processing then depending upon the type of end product to be produced. It has been decided that a standard costing system could be usefully employed within Britten and a pilot scheme is to be operated for six months based initially only on department B, the second department in the initial common series of operations. If the pilot scheme produces useful results then a management accountant will be employed and the system would be incorporated as appropriate throughout the whole firm. The standard cost per unit of output of department B is: Particulars Amount Amount Direct labour (14 hours at ` 2 per hour) 28 Direct materials: 1. Output of department A (3 kg at ` 9 per kg) 2. Acquired by and directly input to department B material (4 kg at ` 5 per kg.) Variable overhead (at ` 1 per direct labour hour worked) Fixed production overheads: 1. Directly incurred by department B (note1) manufacturing overhead (per unit) 2. Allocated to department B general factory overhead (per unit) Standard cost per unit ` 100 In the first month of operation of the pilot study (month 7 of the financial year), department B had no work in progress at the beginning and the end of the month. The actual costs allocated to department B in the first month of operation were:

52 Direct labour (6500 hours) Direct materials: I. Output of Department A (1400 Kg) (Note 2) II. Material X (1900 Kg.) Variable overheads Fixed overheads 1. Directly incurred manufacturing overhead 2. Allocated to department B (Note 3) Particulars ` ` 14,000 21,000 11,500 1,600 2,900 32,500 8,000 4,500 59,000 Note 1: Based on normal monthly production of 400 units Note 2: Actual cost of output of department A. Note 3: Based and allocated to departments in accordance with labour hours worked. The production manager feels that the actual costs of $59,000 for production of 500 units indicates considerable inefficiency on the part of department B. He says, I was right to request that the pilot standard costing system be carried out in department B as I have suspected that they are inefficient and careless this overspending of $9,000 proves I am right. Required: (a) Prepare a brief statement which clearly indicates the reasons for the performance of department B and the extent to which that performance is attributable to department B. The statement should utilize variance analysis to the extent it is applicable and relevant. (b) Comment on the way the pilot standard costing system is currently being operated and suggest how its operation might be improved during the study period. Data for Resource Variance Material Standard Actual Output of A X Material Labour Hr. Variable OH Qty. Rate Amount Qty. Rate Amount 1,500 2,000 7,000 7, ,500 10,000 14,000 7,000 1,400 1,900 6,500 6, ,000 11,500 14,000 8,000 44,500 54,500

53 Standard Cost Controllable Variances: Material Usage Variance = (S.Q. A.Q.) A.R. A (1,500 1,400) 9 = 900 (F) B (2,000 1,900) 5 = 500 (F) Labour Efficiency Variance = (S. Hr A.W. Hr) S.R. (7,000 6,500) 2 = 1000 (F) (a) Statement of performance Amount 50,000 1,400 (F) 1,000 (F) Fixed Overhead Efficiency Variance = (S. Hr A. Hr) S.R. (7,000 6,500) Variable OH Efficiency Variance = (S. Hr A.Q. Hr) S.R. = (7,000 6,500) (F) 500 (F) Uncontrollable Variances: Material Prices Variances = (S.R. A.R.) A.Q. Output of A (9 15) 1,400 = 8,400 (A) Material X (5 6.05) 1,900 = 2,000 (A) Labour Rate Variance = ( ) 6,500 Variable overhead Expenses Variance = ( ) 6,500 Fixed Overhead Expenses Variance = (4,400 4,500) Fixed Overhead Capacity Variance = (6,500 5,600) Actual Cost 10,400 (A) 1,000 (A) 1,500 (A) 100 (A) 707 (F) 59,000 Comment: It is better to apply the technique of standard witting not only on department B but also on other department (i.e. within the company) PLANNING AND OPERATING VARIANCE Question 65: ABC Ltd produces jams and other products. The production pattern for all the products is similar first the fruits are cooked at a low temperature and then subsequently blended with glucose syrup citric acid and pectin are added henceforth to help setting. There is huge competition in the market because of which margins are tight. The firm operates system of standard costing for each batch of jam.

54 The standard cost data for a batch of jam are: Fruit extract Glucose syrup Pectin Citric acid Labor 400 ` 1 per kg 700 ` 2 per kg 99 ` 1 per kg 1 `` 5 per kg 18 `2 per hour Standard processing loss 3%. As a consequence of unfavorable weather in the relevant year for the concerned crop, Normal prices in the trade were ` 2 per kg for fruit extract although good buying could achieve some, The actual price of Syrup had also gone up by 20% from Standards. This was because of increase in customer duty of Sugar. The actual results for the batch were: Fruit extract Glucose syrup Pectin Citric acid Labour 428 ` 4 per kg 742 `` 5 per kg 125 ` 2 per kg 1 ` 6 per kg 20 ` 4 per hour Actual output was 1164 kg of jam. Required: (a) Calculate the ingredients planning variances that are deemed uncontrollable; (b) Calculate the ingredients operating variances that are deemed controllable; (c) Calculate the mixture and yield variance; Calculate the total Variance for the batch. Data for Resource Variances Material Original Standard Revised Standard Actual Qty. Rate Qty. Rate Qty. Rate Fruit Extract Glucose Syrup Pectin Citric Acid Labour , , , ,904 1,200 2, , ,940 2,620 5,758 (a) Statement of Uncontrollable Planning Variances Ingredients Traditional Variance (Original Actual) Planning Variances (Original Standard Revi. Stan.) ,712 3, Operating Variances (Revised Stand Actual)

55 Price Variance Fruit Extract (D.M.) Glucose Syrup Pecting Citric Acid Labour Variance 400 1,712 = 1,312 (A) 1,400 3,710 = 2,310 (A) = 151 (A) 5 6 = 1 (A) = 45 (A) = 400 (A) 1,400 1,680 = 280 (A) = NIL 5 5 = NIL = NIL 800 1,712 = 912 (A) 1,680 3,710 = 2,030 (A) = 151 (A) 5 6 = 1 (A) = 44 (A) Question66: POV Ltd uses a standard costing system to control and report upon the production of its single product. An abstract from the original standard cost card of the product is as follows: For period 3: 2500 units were budgeted to be produced and sold but the actual production and sales were 2850 units. The following information was also available: (i) At the commencement of Period 3 the normal material became unobtainable and it was necessary to use an alternative. Unfortunately, 0.5 kg per unit extra was required and it was thought that the materials would be more difficult to work with.the price of the alternative was expected to be ` per kg. In the event, actual usage was kg at ` 18 per kg. (ii) Weather conditions unexpectedly improved for the period with the result that a ` 0.50 per hour bad weather bonus, which had been allowedfor in the original standard, did not have to be paid.because of the difficulties expected with the alternative material, management agreed to pay the workers ` 8per hour for period 3 only. During the period 18,800 hours were paid for. After using conventional variances for some time, POV Ltd is contemplating extending its system to include planning and operational variances. Required: (a) To prepare a statement reconciling budgeted contribution for the period with actual contribution, using conventional material and labour variances; (b) To prepare a similar reconciliation statement using planning and operational variances; Data for Resource Variances Original Standard Revised Standard Actual Material Qty. Rate Material (kg) Labour (hrs.) 2,850 4 = 11, ,850 = 17, ,28,000 1,19,700 Qty. 12,825 (2, ) 17,100 Rate 16.52,11, ,11,150 Qty. 12,450 18,800 Rate 18 8 (``) 2,24,100 1,50,400 3,47,700 3,22, ,74,500 (a) Statement of Reconciliation (Planning and Operating Variances) Amount

56 Budgeted Contribution Sales Variances Cost Volume Variance (2,500 78) Sales Margin Price Sales Margin volume (2,500 2,850) 78 Total Planning Variance (b) Total Operating Variance (b) Actual Contribution (2, ,74,500) 1,95,000 27,300 (F) 24,937.5 (F) 51,737.5 (A) 1,95,500 PArticulars Traditional Variances (original Actrual Standard) (b) Statement of Variances Planning Variacnes( original standard Revised standards) 1:- MAteiral Cost Variance 2,28,000-2,24,100 =3900(F) 2,28,000-2,11,612.5=16,387.5(F) 2:- Material Price Variacne (20-18) X 12,450 = ( ) X 12,825 = 24,900(F) 44,887.5(F) 3:- Material Usage variance (11, ) X 20 = (11,400 12,825) X 20 21,000(A) = 28,500(A) 4:- Labour Cost varaince 1,19,700 1,19,700-1,50,400=30,700(A) 1,11,150=8,550(F) 5:- Labour Rate variance (7 8) X 18,800 = 18,800(A) (7 6.5) X 17,100=8,550(F) 6:- Labour Efficiency (17,100-18,800) X7 = (17,100 17,100) X 7 Variances 11,900(A) = Nil Operating variances(revised stand- Actual) 2,11, ,100=12,487.5(A) ( ) X 12,450 = 18,675(A) (12,825-12,450) X 16.5= 6,187.5(F) 1,11,150 1,50,400 = 39,250(A) (6.5-8) X 18,800=28,200(A) (17,100-18,800) X 6.5=11,050(A) Total Variances 29,800(A) 49,875(F) 51,737.5(A) Question 68: (Growth, price-recovery, and productivity components) Oceano T-shirt company sells a variety of T-shirts. Oceano presents the following data for its first two years of operations, 2003 and for simplicity, assume that all purchasing and selling costs are included in the average cost per T- shirt and that each customer buys one T-shirt. Number of T-shirts purchased Number of T-shirts lost Number of T-shirts sold Average selling price Average cost per T-shirt Administrative capacity in terms of number of customers that can be served Administrative costs Administrative cost per customer ,000 30, ,600 29,700 `15 ` 10 40,000 `80,000 ` 14 ` 9 36,000 ` 68,400 ` 2 ` 1,90 Administrative costs depend on the number of customers that Oceano has created capacity to support, not the actual number of customers served. Required: Calculate the growth price-recovery, and productivity components of changes in operating income between 2003 and Balance Score Card Last Year Profit (2003) Growth Price Productivity Current Year Profit

57 Revenue 2,94,000 Less: Cost Material 2,00,000 Others 80,000 Profit 14,000 A. 1,51,500 (F) B. 1,03,060.4 (A) 48,440 (F) C. 29,700 (A) D. 30,000 (F) E. 11,600 (F) 11,900 (F) F. 3,061 (F) 3,061 (F) 4,15,800 2,70,000 68,400 77,400 A. Revenue effect of Growth = (B.Q. A.Q.) B.S.P. = (19,600 29,700) 15 = 1,51,500 F. B. Cost Effect of Growth = (B.Q. A.Q.) B.V.C. = (19,600 29,700) = 1,03,060.4 A C. Revenue effect of price = (B.S.P. A.S.P.) A.Q. = (15 14) 29,700 = 29,700 A. D. Cost effect of price M.P.V. = (S.R. A.R.) A.Q. = (10 9) 30,000 = 30,000 F E. Cost effect of Price (Fixed) = fixed overhead expense variance = Budget Actual = 80,000 68,400 = 11,600 F. F. Productivity (Material Usage Variance) = (30, ,000) 10 = 3062 F. Working Notes: 1. Data for Resource Variance Budget Standard Actual Qty. Rate Qty. Rate Qty. Rate Material 20, ,00,000 30, ,03,061 30, ,70, Question 71: Following a strategy of product differentiation, Westwood Corporation makes a highend kitchen range hood, KE8. Westwood s data for 2005 and 2006 follow:

58 Units of KE8 produced and sold Selling price Direct materials (square feet) Direct material cost per square foot Manufacturing capacity for KE8 Conversion costs Conversion cost per unit of capacity (Row 6 Row 5) Selling and customer-service capacity Selling and customer-service costs Cost per customer of selling and customer-service capacity (Row 9 Row 8) 40,000 ` ,000 ` 10 50,000 units ` 1,000,000 ` customer ` 720,000 ` 24,000 42,000 ` ,000 ` 11 50,000 units ` 1,100,000 ` customer ` 725,000 ` 25,000 Westwood produced no defective units and reduced direct material usage per unit of KE8 in Conversion costs in each year are tied to manufacturing capacity. Selling and customer-service costs are related to the number of customers that the selling and service functions are designed to support. Westwood has 23 customers (wholesalers) in 2005 and 25 customers in Required: Describe briefly the elements you would include in Westwood s balanced scorecard. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2005 to Suppose during 2006, the market size for high-end kitchen range hoods grew 3% in terms of number of units and all increases in market share (that is, increases in the number of units sold greater than 3%) are due to Westwood s product- differentiation strategy. Calculate how much of the change in operating income from 2005 to 2006 is due to the industry- market-size factor, cost leadership, and product differentiation. How successful has Westwood been in implementing its strategy? Explain. 1. The balanced scorecard should describe Westwood s product-differentiation strategy. Elements that should be included in its balanced scorecard are: Financial perspective: Increase in operating income from higher margins on KE8 and from growth Customer perspective: Market share in the high-end market and customer satisfaction Internal business process perspective: Manufacturing quality, order-delivery time, on-time delivery, and new product features added, development time for new products and improvements in manufacturing processes Learning-and-growth perspective: Percentage of employees trained in process and quality management and employee satisfaction ratings. 2. Operating income for each year is:

59 Revenues (` 100 per unit 40,000 units; ` 110 per unit 42,000 units) Costs Direct material costs (` 10 per sq. ft. 120,000 sq. ft.; ` 11 per sq. ft. 123,000 sq. ft.) Conversion costs (` 20 per unit 50,000 units; ` 22 per unit 50,000 units) Selling and customer-service costs (` 24,000 per customer 30 customers; ` 25,000 per customer 29 customers) ` 4,000,000 1,200,000 1,000, ,000 ` 4,620,000 1,353,000 1,100, ,000 Total costs 2,920,000 3,178,000 Operating income ` 1,080,000 `1,442,000 Change in operating income `362,000 F Growth Component of Operating Income Change Revenue effect of growth =Actual units of output Actual units of output sold in 2005 Selling price in 2005 = (42,000 units 40,000 units) ` 100 per unit = ` 200,000 (F) Cost effect of growth for variable costs = Units of input required to produce 2006 output in 2005 Actual units of input used to produce 2005 output Input price in 2005 Cost effect of growth for direct materials =( Sq.Ft X 42,000 units 120,000Sq.Ft = `60,000 U 40,000 units = (126,000 sq. ft. 120,000 sq. ft.) ` 10 per sq. ft. = ` 60,000 U Cost effect of growth for fixed costs = Actual units of capacity in 2005 because adequate capacity exists to produce 2006 output in 2005 Actual units of capacity in 2005 Price per capacity in 2005 Cost effects of growth for fixed costs are: Conversion costs: (50,000 units 50,000 units) ` 20 per unit = ` 0 Selling and customer-service costs: (30 customers 30 customers) ` 24,000 per customer = ` 0 In summary, the net increase in operating income attributable to growth equals: Revenue effect of growth Cost effect of growth Direct material costs Conversion costs Selling and customer-service costs Change in operating income due to growth Price-Recovery Component of Operating-Income Change ` 60,000 (A) 0 0 ` 200,000 (F) 60,000 (A) ` 140,000 (F) Revenue effect of = Selling price Selling price price recovery in 2006 in 2005 Actual units of output = (` 110 per unit ` 100 per unit) 42,000 units = ` 420,000 (F) Cost effect of = Input Input Units of input price recovery price price required to produce

60 for variable costs in 2006 in output in 2005 Direct material costs: (`11 per sq. ft. ` 10 per sq. ft.) 126,000 sq. ft. = ` 126,000 (A) Cost effect of = Price per Price per Actual units of capacity in price recovery unit of unit of 2005, because adequate capacity for fixed costs capacity capacity exists to produce 2006 output in 2005 Cost effects of price recovery for fixed costs are: Conversion costs: (` 22 per unit 20 per unit) 50,000 units = `100,000 (A) Selling and cust.-service costs: (` 25,000 per cust. ` 24,000 per cust.) 30 customers = ` 30,000 (A) In summary, the net increase in operating income attributable to price recovery equals: Revenue effect of price recovery Cost effect of price recovery Direct material costs `126,000(A) ` (F) Conversion costs 100,000(A) Selling and customer-service costs 30,000(A) (A) Change in operating income due to price recovery Productivity Component of Operating-Income Change Cost effect of = Actual units of Units of input productivity for input used to produce required to produce variable costs 2006 output 2006 output in 2005 `164,000(F) Cost effect of = (123,000 sq. ft. 126,000 sq. ft.) ` 11 per sq. ft. = ` 33,000 (F) productivity for direct materials Cost effect of = Actual units Actual units of capacity in productivity for of capacity 2005, because adequate fixed costs in 2006 capacity exists to produce 2006 output in 2005 Cost effects of productivity for fixed costs are: Conversion costs: (50,000 units 50,000 units) ` 20 per unit = ` 0 Selling and customer-service costs: (29 customers 30 customers) ` 25,000/customer = ` 25,000 (F) In summary, the net increase in operating income attributable to productivity equals: Cost effect of productivity: ` 33,000 (F) Direct material costs 0 Conversion costs 25,000 (F) Selling and customer-service costs Change in operating income due to productivity ` 58,000 (F) A summary of the change in operating income between 2005 and 2006 follows:

61 Income Statement Amounts in 2005 Revenue and Cost Effects of Growth Component in 2006 Revenue and Cost Effects of Price-Recovery Component in 2006 Cost Effect of Productivity Component in 2006 Income Statement Amounts in 2006 Revenue Costs Operating income (1) (2) (3) (4) (5) = (1) + (2) + (3) + (4) ` 4,000,000 ` 200,000 (F) `420,000 (F) ` 4,620,000 2,920,000 60,000 (A) 256,000 (A) ` 58,000 (F) 3,178,000 ` 1,080,000 ` 140,000 (F) ` 164,000 (F) ` 58,000 (F) ` 362,000 (F) Change in operating income ` 1,442, Effect of the industry-market-size factor on operating income Of the increase in sales from 40,000 to 42,000 units, 3%, or 1,200 units ( ,000), is due to growth in market size,and 800 units (2,000 1,200) are due to an increase in market share. The change in Westwood s operating income from the industry-market-size factor rather than specific strategic actions is: $ (column 2 of preceding table) X 1,200 units ` 84,000(F) 2,000 units The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Westwood s successful implementation of its product-differentiation strategy. The company was able to continue to charge a premium price for KE8 while increasing market share. Westwood was also able to earn additional operating income from improving its productivity.