Management Accounting 2 nd Year Examination. Additional Sample Questions and Solutions - Variance

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1 Management Accounting 2 nd Year Examination Additional Sample Questions and Solutions -

2 Additional Question 1 The following information relates to product X which is produced by STADIUM Ltd. during December: s Materials price 28,500 Favourable Materials usage 10,500 Adverse Labour rate 24,980 Adverse Labour efficiency 40,000 Favourable Actual data Materials costs Labour costs Production volume 600,000 for 40,000kg 784,000 for 55,000 hrs. 10,000 units Actual and standard production volumes are the same. Required: (a) Prepare a standard cost sheet for Product Z. 10 Marks (b) Outline two possible reasons for each of the material price and labour efficiency variances. 4 Marks (c) Briefly list and explain three benefits and three limitations of a standard costing system. 6 Marks Total: 20 Marks

3 Solution to Additional Question 1 Standard cost per kg of material Material price variance 40,000kg should have cost (40,000 x C) 40,000C 40,000kg did cost 600,000 28,500 F 40,000kg should have cost 628,500 (Bal. Fig) 40,000kg did cost 600,000 28,500 F Therefore 40,000 x Cost = 628,500 Standard cost per kg of material = 628,500/40,000 = (round off to 15.71) Standard kg of material used per unit of product Material usage variance Kg 10,000 units should have used (10,000 x kg) 10,000K 10,000 units did use 40,000 in kg x standard cost per kg Therefore the variance in kg is / 10,500/ / = 668kg 10,500 A Kg 10,000 units should have used (10,000 x kg) 39,332 (Bal. Fig.) 10,000 units did use 40, A x standard cost per kg / 10,500 A Therefore 10,000 x K = 39,332 Standard kg per unit of product is 39,332/10,000 = 3.93Kg 3

4 Standard cost per labour hour Labour rate variance 55,000 hours should have cost (55,000 x C) 55,000C 55,000 hours did cost 784,000 24,980 A 55,000 hours should have cost (55,000 x C) 759,020 (Bal. Fig.) 55,000 hours did cost 784,000 24,980 A Therefore 55,000 x Cost = / 759,020 Standard cost per labour hour = / 759,020/55,000 = / Labour hours per unit of product Labour efficiency variance Hrs. 10,000 units should have used (10,000 x hrs.) 10,000H 10,000 units did use 55,000 in hrs x standard cost per hr ,000 F Therefore the variance in hours is / 40,000/ / = 2,898 hrs. Hrs. 10,000 units should have used (10,000 x hrs.) 57,898 10,000 units did use 55,000 2,898 x standard cost per hr / ,000 F Therefore 10,000 x hrs = 57,898 Standard hours per unit of product is 57,898/10,000 = 5.79hrs 4

5 Standard cost card per unit Materials cost per kg Labour cost per hour Total cost

6 Additional Question 2 The standard cost card (per unit) for the Visual, one of the products produced by THOMOND Ltd is as follows. / Direct material 6 per kg 192 Direct labour per hr. 144 Fixed production overhead per hr During August 2013 Thomond Ltd reported the following variances for the Visual Material price Material usage Labour rate Labour efficiency Fixed production overhead expenditure Fixed production overhead volume 37,680 favourable 960 adverse 21,196 adverse 16,956 favourable 20,000 favourable 25,200 favourable Actual data Fixed production overhead 400,000 Direct labour cost 342,640 Direct material cost per kg 9 Required: a) Calculate the following i. Budgeted output ii. Actual hours worked iii. Actual labour rate per hour iv. Actual output v. Actual number of kg of materials used 12 Marks b) Outline the key factors that should be considered before deciding whether or not a variance should be investigated. 4 Marks c) Outline two possible reasons for each of the fixed production overhead expenditure and fixed production overhead volume variances calculated. 4 Marks Total: 20 Marks 6

7 Solution to Additional Question 2 i. Budgeted output Fixed overhead expenditure variance / Budgeted fixed overhead expenditure ( / 168 x budgeted output) 168 x BO Actual fixed overhead expenditure 400,000 20,000 F Budgeted fixed overhead expenditure ( / 168 x units) 420,000 (Bal. Fig) Actual fixed overhead expenditure 400,000 20,000 F Therefore 168 x BO = 420,000 Budgeted output = 420,000/168 = 2,500 units ii. Actual labour hours worked Labour rate variance Actual hours should have cost (AH x 12) 12 AH Actual hours did cost 342,640 21,196 A Actual hours should have cost (AH x 12) 321,444 Actual hours did cost 342,640 21,196 A Therefore actual hours / 321,444/12 = 26,787 hours iii. Actual labour rate per hour Actual cost 342,640/26,787 =

8 iv. Actual output Labour efficiency variance Actual outputs should have taken (12 x AO) 12AO Actual output did take 26,787 in hours F x standard rate per hour 12 16,956 F Therefore the variance in hours is / 16,956/ / 12 = 1,413 hrs. Actual output should have taken (12 x AO) 28,200 Actual output did take 26,787 1,413 F x standard rate per hour 12 16,956 F Therefore actual output 28,200/12 = 2,350 units or Production overhead volume variance Budgeted output Actual output 2,500 2, F x standard rate per unit ,200 F v. Actual kg of material used Material usage variance Kg 2,350 units should have used (2,350 x 32kg) 75,200 2,350 units did use in kg x standard cost per kg A Therefore the variance in kg is / 960/ / 6 = 160kg 8

9 Kg 2,350 units should have used (2,350 x 32kg) 75,200 2,350 units did use 75,360 (Bal. Fig) x standard cost per kg A 960 A Therefore actual kg of material used is 75,360kg. 9

Understanding Variance Analysis By: Helen O Brien Gately B Comm; MAcc; FCA. Examiner: Formation 2 Management Accounting

Understanding Variance Analysis By: Helen O Brien Gately B Comm; MAcc; FCA. Examiner: Formation 2 Management Accounting It often appears that students who experience difficulties with variance analysis