Cipfa WB4

MANAGEMENT ACCOUNTING
FINANCIAL CONTROL
SOLUTIONS 4
Updated January 2018
Valid for exams in 2018
1
Management Accounting
First published 2015
CIPFA
77 Mansell Street
London E1 8AN
+ 44 (0)20 75435600
Email: [email protected]
Website: www.cipfa.org.uk
Copyright © 2015 Chartered Institute of Public Finance and Accountancy
All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without either the prior written
permission of the publishers or a licence permitting restricted copying in the
United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House,
6–10 Kirby Street, London EC1N 8TS.
Every possible care has been taken in the preparation of this publication but no
responsibility can be accepted for loss occasioned to any person acting or
refraining from action as a result of any material contained herein.
2
4: Financial control
Table of contents
Exercise Solution 4.1 ................................................................. 4
Exercise Solution 4.6 ............................................................... 10
Exercise Solution 4.10 ............................................................. 16
3
Exercise Solution 4.1

The characteristics of useful budgetary control information include:
 Relevance – irrelevant information is not related to the decision

or issue under consideration. It is sometimes called ‘noise’ as it
can be a distraction to the recipient. The control information
should relate to those budget areas the recipient is responsible
for.
 Clarity – information that is not clear will not be understood,

and will not, therefore, be useful. Clarity may be helped by
using visual presentation methods, such as graphs or charts
comparing budget and actual figures. Information should be
presented with comparable figures from one period to the next,
in order for managers to be able to identify trends.
 Timeliness – in order to be of use, the information must be

received in time for the recipient to act on it. If there is a delay
of several weeks or even months between an overspend arising
and the control report reaching the relevant budget holder,
there will be a corresponding delay in any action being taken.
 Reliability –information should be as accurate as required,

objective and free from bias. Forward looking forecasts will
always include a degree of subjectivity.
 Completeness – information should provide an understanding of

the full picture. For example where budget spending in one
area affects the spending in another it is important that both
areas are covered and the relationship explained.
You may have mentioned other qualities such as conciseness or
presentation which would also be relevant here.
4

(a) Budgeted Operating Statement at 65% capacity
£000s
Sales
less cost of sales:
Materials (390)
Wages (535)
Production overhead (270)
Total cost of sales (1 195)
Gross profit 755
less expenses:
Administration (50)
Selling (114)
Distribution (135)
Non-manufacturing overhead (220)
Total expenses (519)
Net Profit 236
Notes:
 Sales: Variable Income – 200 000 units × 65% × £15
 Materials: Variable – £3 per unit
 Wages: Semi-Variable – £15 000 Fixed + £4 per unit
 Production Overhead: Semi-Variable – £10 000 Fixed + £2

per unit
 Administration: £50 000 Fixed Cost
 Selling: Semi-Variable – £10 000 Fixed + £0.80 per unit
 Distribution: Semi-Variable – £5 000 Fixed + £1 per unit
 Non-manufacturing overhead: Semi-Variable – £25 000

Fixed + £1.50 per unit
(b) Use of the budget
Planning
The budgeted operating statement sets the plan for the coming
period. Control is not possible if you do not have a target set.
Control
Through the use of regular feedback, actual results are
compared to budget. Action is taken to rectify any unfavourable
5
deviations and capitalise further on any favourable

developments.
Performance Measurement/Monitoring
The operating statement provides the budget against which to
measure actual performance in the different areas of the
organisation.
Motivation
The budget could be used as a motivation tool by possibly
offering some kind of bonus for achievement of the budget
hence encouraging managers to implement control within their
budget areas.
Communication
The final agreed budget provides an unequivocal record of
expected performance by all units of the organisation and so
once communicated to managers they can be held accountable
for deviations from the budget.
Co-ordination
The budgeted operating statement shows how the incomes and
costs relate to each other and result in profits and allows
departments to ensure that they are co-ordinating their efforts
to achieve the overall budget.
6
 Materials cost variance
Should have cost 1 100 × 2.8kg × £4.80 per kg = £14 784

Did cost = £15 100
Materials cost = £316 A
variance
 Materials price variance (SP-AP) × AQ

3 200kg × £4.80 – £15 100 = £260 F
 Materials usage variance (SQ-AQ) × SP

[(1 100 × 2.8kg) – 3 200kg] × £4.80 per kg = £576 A
 Labour cost variance
Should have cost 1 100 × 6.4 hours × £3.75 = £26 400

per hour
Did cost = £27 056
Labour cost = £656 A
variance
 Labour rate variance (SR-AR) × AH

7 120 hours × (£3.75) – £27 056 = £356 A
 Labour efficiency variance (SH-AH) × SR

[(1 100 × 6.4 hours)-(7 120 hours)] × £3.75 per hour = £300 A
7
 Materials Cost Variance

Should have cost 1 100 × 2.8kg × £4.80 per kg = £14 784
Did cost = £15 700
Materials cost = £916 A
variance
 Materials Price Variance (SP-AP) × AQ
 MPV = (£4.80 - {15,700 / 3,200}) * 3,200
MPV = (4.80 * 3,200) - 15,700
MPV = 15,360 - 15,700 = 340 Adverse
 Materials Usage Variance (SQ-AQ) × SP

[(1 100×2.8kg) – 3 200kg] ×£4.80 per kg = £576 A
 Labour Cost Variance

Should have cost 1 100 × 6.4 hours × £3.75 per = £26 400
hour
Did cost = £27 056
Labour cost = £656 A
variance
 Labour Rate Variance (SR-AR) × AH

7 250 hours × (£3.75) – £27 056 = £131.50F
 Labour Efficiency Variance (SH-AH) × SR

[(1 100 × 6.4 hours) – (7 250 hours)] × £3.75 per hour =
£787.50A
8
 Materials cost variance

Should have cost 1 100 × 2.8kg × = £15 400
£5 per kg
Did cost = £15 200
Materials cost variance = £200 F
 Materials price variance (SP-AP) × AQ

3 200kg × £5 – £15 200 = £800 F
 Materials usage variance (SQ-AQ) × SP

[(1 100 × 2.8kg) – 3 200kg] × £5 per kg = £600 A
 Labour cost variance

Should have cost 1 100 × 6.4 hours × = £31 680
£4.50 per hour
Did cost = £30 150
Labour cost variance = £1 530 F
 Labour rate variance (SR-AR) × AH

(7 100 hours × £4.50) – £30 150 = £1 800 F
 Labour efficiency variance (SH-AH) × SR

[(1 100 × 6.4 hours) – (7 100 hours)] × £4.50 per hour =
£270 A
9

Materials price variance (SP – AP)× AQ
A (5.00 – 5.50) × 6 300 kg = £3 150 A
B (3.00 – 2.50) ×2 500 kg = £1 250 F
C (1.00 – 1.00) × 1 200 kg = £0
Total = £1 900 A
Materials usage variance (SQ – AQ) × SP
A (5 400 – 6 300) × £5 = £4 500 A
B (2 700 – 2 500) × £3 = £600 F
C (900 – 1 200) × £1 = £300 A
Total = £4 200A
Note:
This question is complicated somewhat by the fact that standard
quantities for the material are not actually given. Instead we are told
that we expect a normal loss on production of 10%.
You should remember from process costing in Workbook 2 how we
can use this to calculate the standard quantity of materials required.
If we know that 10% of materials should be lost in the production
process then we know that we expect only 90% of what was put into
the process to make it out into the final product.
We would therefore expect the amount of output to be 90% of the
quantity of materials input. We can therefore say that 8 100kg
should be 90% of the standard quantity of materials input.
To calculate the standard quantity therefore:
8 100 ÷ 90 × 100 = 9 000kg is the standard input.
We can perform a quick check. If 9 000kg were input and 10% were
lost, (900kg loss) then 8 100kg would be the expected output.
The final stages are to break-down the standard quantity of 9 000kg
into the standard mix using the percentages: 60% A, 30% B and
10% C to give us the standard quantities for A, B and C:
9 000 × 0.6 = 5 400 kg of A
9 000 × 0.3 = 2 700 kg of B
9 000 × 0.1 = 900 kg of C
Materials cost variance
Note:
The 1 900 A materials purchases variance and the 4 200 A materials
usage variance add up to 6 100 A which is equal to the total
10
materials cost variance. The materials cost variance is also

calculated below.
Materials cost (SC –AC)
Material Standard cost Actual cost Variance

A 5 400 kg at £5 = 6 300 kg at £5.50 = 7 650 A
27 000 34 650
B 2 700 kg at £3 = 2 500kg at 2.50 =6 250 1 850 F
8 100
C 900kg at £1 = 900 1 200kg at £1 = 1 200 300 A
Total 6 100 A
Materials mix variance (AQSM – AQAM) × SP
Material AQSM AQAM SP Variance

A 6 000 6 300 £5 1 500 A
B 3 000 2 500 £3 1 500 F
C 1 000 1 200 £1 200 A
Total 10 000 10 000 200 A
Note:
The standard mix is 60% A, 30% B and 10% C. Therefore, the
10 000 kgs should have been:
10 000 ×0.6 = 6 000 kg of A
10 000 × 0.3 = 3 000 kg of B
10 000 × 0.1 = 1 000 kg of C
Materials yield variance (SQSM – AQSM) × SP
Material SQSM AQSM SP Variance

A 5 400 6 000 £5 3 000 A
B 2 700 3 000 £3 900 A
C 900 1 000 £1 100 A
Total 9 000 10 000 4 000 A
11
Variance Formula Variance

Materials cost SC – AC 90.15 A
Materials price X AQ × (SP-AP) 40.75 A
Materials price Y AQ × (SP-AP) 75 F
Materials price Z AQ × (SP-AP) 0
Materials usage X (SQ-AQ)× SP 60 F
Materials usage Y (SQ-AQ)× SP 174.05 A
Materials usage Z (SQ-AQ)× SP 10.35 A
Materials mix variance (AQSM – AQAM) × SP

X 870 815 £1.20 66 F
Y 1 450 1 500 £2.95 147.50 A
Z 580 585 £1.15 5.75 A
Total 2 900 2 900 £87.25 A
Materials yield variance (SQSM – AQSM) × SP

X 865 870 £1.20 6A
Y 1 441 1 450 £2.95 26.55 A
Z 576 580 £1.15 4.60 A
Total £37.15 A
 Calculation of SQSM:
During the process 2 450kg were produced. There is a standard
loss of input of 15%. So for every 100kg input 85kg of output
should be produced. Therefore output should be 85% of input.
If 2 450kg output was achieved then kilograms input should
have been:
2 450 = 85%
2 450/85% = 1% = 28.85 so 100% = 2 882 kg.
12

Profit reconciliation statement:
Variance Favourable Adverse Cost

variances variances variances
£ £ £
Budgeted profit 16 700
Sales price variance –
Sales volume variance (1 336)
Materials price - Alcohol 1 380
Materials price - Juice (253)
Materials mix 10 559
Materials usage yield (1 635)
Material cost 10 051
Labour rate 370
Labour efficiency (1 627)
Labour cost (1 257)
Variable overhead 2 454
expenditure
Variable overhead (3 070)
efficiency
Variable overhead cost (616)
Fixed overhead (5 000)
expenditure
Fixed overhead (4 605)
efficiency
Fixed overhead capacity 3 405
Fixed overhead cost (6 200)
Actual profit 17 342
Mix and Yield:
Materials mix variance:
Standard mix AQSM - AQAM x SP
0.1 litres Alcohol 958 - 690 × 40 = 10 720 (F)
0.5 litres Juice 4 792 - 5 060 × 0.6 = 161 (A)
0.6 litres total 5 750 5 750 10 559 (F)
13
Material yield variance:
Standard mix SQSM - AQSM x SP
0.1 litres Alcohol 920 - 958 × 40 = 1 520 (A)
0.5 litres Juice 4 600 - 4 792 × 0.6 = 115 (A)
0.6 litres total 5 520 5 750 1 635 (A)
Variance Formula Workings Variance

£
Budgeted Budgeted profit × (£9 – £7.33) × 10 000 jugs 16 700

Profit budgeted units
SVV (AQ – SQ) × Sn (9 200–10 000) × (£9-£7.33) 1 336 A
MPV - (SP – AP) × AQ ((1 000/25 × £1)– 1 380 F

Alcohol (£26 220/690))×690
MPV - (SP – AP) × AQ (0.6-(3 289/5 060))×5 060 253 A

Juice
MUV - (SQ – AQ)× SP ((0.1 × 9 200)–690) × £40 9 200 F

Alcohol
MUV - (SQ – AQ)× SP ((0.5 × 9 200)-5 060) ×£0.6 276 A

Juice
LRV AH× (SR – AR) (£5.30–(£6 133/1 227 hours)) × 370 F

1 227 hours
LEV (SH – AH) × SR ((0.1 hours x9 200)-1 227 hours) 1 627 A

× £5.30
VExV (SR – AR) × AH (£10-(£9 816/1 227 hours) × 2 454 F

1 227 hours
VEfV (SH – AH) × SR ((0.1 hours × 9 200) – 1 227 3 070 A

hours) × £10
FExV BFO – AFO (£1.50 per unit × 10 000)– 5 000 A

£20 000
FEfV (SH – AH) × SR (0.1 hours × 9 200)–1 227 hours) 4 605 A

× £15 per hour
FCV (AH – BH) × SR (1 227hours-(0.1hours×10 000) × 3 405 F

£15
14

Standard costing works well in the manufacturing sector because
one unit of a particular product should be identical to the next. In
the service sector this cannot always be the case because different
people require services tailored to their specific needs.
There can also be difficulty in measuring both the resources
consumed and the actual level of output for services which are not
tangible in the way that manufactured products are.
One last problem is that the cost of implementing such a system
may outweigh the benefits gained as often individual services are
performed in much smaller volumes than products which are
produced for manufacture.
15
 Good performance should be encouraged throughout the

organisation and by investigating what went right and sharing
that best practice, performance may be enhanced in other
areas.
 Favourable performance may be the result of poor standard

setting – targets may not have been sufficiently challenging.
 Strong performance in the period may impact expectations for

the future. Investigation will show whether the result was a
‘one-off’ or an indication of what may be expected to be built in
to future forecasts.
16

(i) Mean
n = 12
Σx = (459 + 503 + 502 + 496 + 495 + 503 + 505 + 499 + 507
+ 497 + 501 + 515)
= 5 982
So mean = 5 982/12 = 498.5g
This means that the average weight of the meals produced is
498.5g
(ii) Median
Arranged in order the weights are:
459, 495, 496, 497, 499, 501, 502, 503, 503, 505, 507, 515
The two middle weights are 501 and 502
The mean of the two is (501 + 502)/2 = 501.5g
This means that half the meals produced weigh less than
501.5g and half weigh more.
(iii) Range
The range = largest – smallest
= 515 – 459 = 56g
This means that the weight of the meals produced varies from
515g to 459g – a range of 56g.
17
(iv) Standard deviation
g g g g
x mean x-mean (x-mean)2
459 498.5 -39.5 1 560.25
503 498.5 4.5 20.25
502 498.5 3.5 12.25
496 498.5 -2.5 6.25
495 498.5 -3.5 12.25
503 498.5 4.5 20.25
505 498.5 6.5 42.25
499 498.5 0.5 0.25
507 498.5 8.5 72.25
497 498.5 -1.5 2.25
501 498.5 2.5 6.25
515 498.5 16.5 272.25
Σ(x-mean)2 2 027
s = √(2 027/12) = 13g

This means that when all the actual weights are compared with
the mean weight, the average variance from the mean is 13g.
This appears very high but has arisen because the meal
weighing 459g was so much lower than average.
18
Lender Amount of Weight Interest Weighted

loan (Loan as a rate interest
£ percentage charged rate
of total % %
borrowing)
Bill’s Bank 50 000 25.7% 5 1.285
Dan’s 77 500 39.9% 7.5 2.993
Debentures
Pete’s 26 400 13.6% 6 0.816
Preferences
Louis’s 40 500 20.8% 4.3 0.894
Loans
194 400 5.988
The weighted average interest rate paid by Top Tables is 6.0% (to
one decimal place).
19

(a) Virements are the transfer of monies from one budget head to
another that can be used if one budget head is overspent.
Regulations relating to the use of virement in a public service
organisation could include the following:
 Create a definition of who is allowed to exercise virement

and whether any virement that is exercised is subject to
approval.
 Establish the level of detail in the budget at which virement

could be exercised.
 Specify the maximum amount that could be transferred,

either in absolute or percentage terms.
 Identify funding to be ring fenced and therefore restricted

in terms of virement.
 There are circumstances that you may want to exclude

from potential virement transactions as being unsuitable.
(b) Constructive behaviour
 Increased motivation – such as where the budget-holder

has been involved in setting the budget and has control
over items included in the budget.
Destructive behaviour could include:
 Lack of motivation – such as if the budget is perceived as

unrealistic, if the budget was imposed by senior managers
or if the budget-holder is unable to control the expenditure
within the budget but being held responsible.
 Resentment against the budget – such as if the budget is

imposed on the budget-holder by senior managers without
consultation or if the budget is perceived as being
unrealistic.
 Manipulation of figures – such as if the budget-holder’s

performance is assessed against achievement of the budget
but the budget is perceived as unachievable.
 Inappropriate decisions on expenditure in an attempt to

achieve the budget. This is likely to occur where managers
have had the budget imposed on them, they perceive it as
20
being unrealistic or they are unable to control the items

they are being held responsible for.
(c) Profiling is necessary to prepare accurate budgetary control
reports by using the actual timing of payments rather than
simply spreading annual costs evenly across the year.
Advantages of profiling include:
 Profiles are based on patterns of known expenditure and

income.
 Not everything is spread evenly over the year, so

comparing against 12ths may distort views on
performance.
 This method can be used to encourage the budget-holders

to get involved (e.g. in deciding the profiling).
 This technique enables better budgetary control and

performance monitoring to be carried out.
21

Profit Reconciliation Statement

£ £ £
Budgeted Profit 80 000
Sales price variance 18 000
Sales variance 10 000
Materials price 120
Materials usage (4 300)
Material cost (4 180)
Labour rate (5 700)
Labour efficiency (4 500)
Labour cost (10 200)
Variable overhead 5 000
expenditure
Variable overhead (3 000)
efficiency
Variable overhead cost 2 000
Fixed overhead 4 000
expenditure
Fixed overhead efficiency (6 000)
Fixed overhead capacity (6 000)
Actual profit 69 620
22

Materials price - A AQ × (SP-AP) 1 900 A
Materials price - B AQ × (SP-AP) 2 020 F
Materials usage - A (SQ-AQ) × SP 1 000 A
Materials usage - B (SQ-AQ) × SP 3 300 A
Materials cost - A SC – AC 2 900 A
Materials cost -B SC – AC 1 280 A
Labour rate AH × (SR–AR) 5 700 A
Labour efficiency (SH-AH) × SR 4 500 A
Labour cost SC – AC 10 200 A
Sales volume (AQ-SQ) × Sn 8 000 A
Sales margin price (AP-SP) × AQ 18 000 F
Total sales AP – BP 10 000 F
Variable overhead (SR-AR) × AH 5 000 F
expenditure
Variable overhead efficiency (SH–AH) ×SR 3 000 A
Fixed overhead expenditure BFO – AFO 4 000 F
Fixed overhead efficiency (SH –AH) ×SR 6 000 A
Fixed overhead capacity (AH-BH) ×SR 6 000 A
23


£000 £000 £000
Budgeted profit 1 200.0

Sales price (600.0)
Sales volume 240.0
Materials price - Chocolate (33)
Materials price - Caramel (67.5)
Materials mix (4.8)
Materials yield (151.2)
Materials cost (256.5)
Labour rate (65)
Labour efficiency 200
Labour cost 135.0
Variable overhead (195)
expenditure
Variable overhead 80
efficiency
Variable overhead cost (115.0)
Fixed overhead (300)
expenditure
Fixed overhead efficiency 240
Fixed overhead capacity 60
Fixed overhead cost 0
Actual profit 603.5
Mix and yield
 Material mix variance
AQSM - AQAM × SP
Chocolate 67.2 - 66 X 1 = 1.2 F
Caramel 268.8 - 270 X 5 = 6A
336 336 4.8 A
24
 Material yield variance
SQSM - AQSM × SP
Chocolate 60 - 67.2 × 1 = 7.2 A
Caramel 240 - 268.8 × 5 = 144 A
300 336 151.2 A
Variance Formula £
Materials price - Chocolate (SP-AP) × AQ 33.0 A
Materials price - Caramel (SP-AP) × AQ 67.5 A
Materials usage - Chocolate (SQ-AQ) × SP 6.0 A
Materials usage - Caramel (SQ-AQ) × SP 150.0 A
Labour rate (SR–AR) × AH 65.0 A
Labour efficiency (SH-AH) × SR 200.0 F
Sales volume (AQ-SQ) × Sn 240.0 F
Sales margin price (AP-SP) × AQ 600.0 A
Variable overhead expenditure (SR-AR) × AH 195.0 A
Variable overhead efficiency (SH–AH) × SR 80.0 F
Fixed overhead expenditure BFO – AFO 300.0 A
Fixed overhead efficiency (SH–AH) × SR 240.0 F
Fixed overhead capacity (AH-BH) × SR 60.0 F
25

Profit reconciliation statement

£000 £000 £000
Budgeted profit 8 500
Sales price variance – –
Materials price - Glass 594
Materials price - Metal (792)
Materials mix 153
Materials usage (461)
Materials cost (506)
Labour rate - Production 440
Labour rate – Testing (275)
Labour mix (220)
Labour yield – –
Labour cost (55)
Variable overhead (330)
expenditure
Variable overhead efficiency
Variable overhead cost (330)
Fixed overhead expenditure (1 950)
Fixed overhead efficiency
Fixed overhead capacity (1 350)
Actual profit 3 289
26
Material mix and yield variances
 Material mix variance
AQSM – AQAM × SP £000
kg – kg × £ = £
Glass 578 769 594 000 10 152 A
Metal 173 631 – 158 400 × 20 = 305 F
752 400 752 400 153 F
 Material yield variance
SQSM – AQSM × SP £000
Glass kg – kg × £ = £
550 000 578 769 10 288 A
Metal 165 000 – 173 631 × 20 = 173 A
715 000 752 400 461 A
Labour mix and yield variances
 Labour mix variance
AHSM – AHAM × SP £000
Production 55 – 44 × 0.08 = 880 F
Testing 11 – 22 × 0.10 = 1 100 A
66 66 220 A
 Labour yield variance
SHSM – AHSM × SP £00

0
Production 55 – 55 × 0.08 = 0
Testing 11 – 11 × 0.10 = 0
66 66 0
Answers calculated in hours are also acceptable and should arrive at
the same overall value.
27

Materials price - Glass (SP-AP) × AQ 594 F
Materials price - Metal (SP-AP) × AQ 792 A
Materials usage - Glass (SQ-AQ) × SP 440 A
Materials usage - Metal (SQ-AQ) × SP 132 F
Labour rate - Production (SR–AR) × AH 440 F
Labour rate - Testing (SR–AR) × AH 275 A
Labour efficiency - Production (SH-AH) × SR 880 F
Labour efficiency - Testing (SH-AH) × SR 1 100 A
Sales volume (AQ-SQ) × Sn 1 020 A
Sales margin price (AP-SP) × AQ 0
Variable overhead expenditure (SR-AR) × AH 330 A
Variable overhead efficiency (SH–AH) × SR 0
Fixed overhead expenditure BFO – AFO 1 950 A
Fixed overhead efficiency (SH–AH) × SR 0
Fixed overhead capacity (AH-BH) × SR 1 350 A
28

Calculation of budgeted and actual profit:
Budgeted £
Sales (5 000 bottles at £16) 80 000
Less:
Materials A £5 000 +B £13 000 (18 000)
Labour (25 000)
Variable costs (7 000)
Fixed overhead costs (20 000)
Actual £
Sales (5 200 bottles) 81 000
Less:
Materials A £5 120 +B £13 000 (18 120)
Labour (27 400)
Variable costs (7 000)
Fixed overhead costs (19 500)
Actual Profit 8 980
29
Variance Favourabl Adverse Cost

e variance variances
variances s £
£ £
Sales Price Variance (2 200)
Sales Volume Variance 400
Materials price 498
Materials usage 102
Materials cost 600
Labour rate 100
Labour efficiency 1 500
Labour cost (1 400)
expenditure
Variable overhead efficiency 420
Variable overhead cost 280
Fixed overhead expenditure 500
Fixed overhead vol. efficiency 1 200
Fixed overhead vol. capacity 2 000
Fixed overhead cost 1 300
Actual Profit 8 980
Note:
Standard Selling Price = £16
Standard Profit Margin = £2
Standard Cost = £14 (including £4 fixed cost)
30
Variance Formula Workings £

SPV (AP – SP) × AQs (£16–(£81 000/5 200)) × 2 200 A
5 200
SVV (AQ – SQ) × Sn (5 200–5 000)×(£6- 400 F
(£20 000/5 000))
MPV - A (SP - AP) × AQ (£1–(£5 120/5 150)) × 5 150 30 F
MPV - B (SP - AP) × AQ (£1.30–(£13 000/10 360)) × 468 F
10 360
MUV - A (SQ - AQ) × SP ((1 × 5 200)–5 150) × £1 50 F
MUV - B (SQ - AQ) × SP (2 × 5 200)–10 360) × £1.30 52 F
LRV (SR – AR) × AH (£2.50–(27 400/11 000)) × 100 F
11 000
LEV (SH - AH) × SR ((2 × 5 200) – 11 000) × 1 500 F
£2.50
VExV (SR - AR) × AH (£0.7 –(£7 000/11 000)) × 700 F
11 000
VEfV (SH – AH) × SR ((2x5 200)-11 000) × £0.7 420 A
FExV BFO – AFO (£20 000–£19 500) 500 F
FEfV (SH – AH) × SR ((2×5 200) – 11 000)×£2 1 200 A
FCV (AH - BH) × SR (11 000 – ( 2×5 000))×£2 2 000 F
Fixed Overhead Variances:
Budget fixed overheads ÷ 5 000 bottles
= £20 000 ÷ 5 000 bottle
= £4 per bottle
Or
£20 000 ÷ 10 000 standard hours = £2 per standard hour
Output = 5 200 bottles = 10 400 standard hours
Fixed Overhead Total Variance
= (10 400 standard hours × £2) – £19 500
= 1 300 F
31
Fixed overhead expenditure variance

= Budget fixed overhead – Actual
= £20 000 – £19 500
= 500 F
Fixed Overhead Volume Variance
= (10 400 standard hours – 10 000 budgeted hours) at £2
= 800 F
Fixed Overhead Capacity
= (11 000 actual hours – 10 000 budgeted hours) × £2
= 2 000 F
Fixed Overhead Efficiency
= (10 400 standard hours – 11 000 actual hours) × £2
= 1 200 A
32

(a) Procedure X

Materials price (SP – AP) × AQ (5-4.5) × 34 17 F
Materials usage (SQ – AQ) × SP ((3×10)–34) × 5 20 A
Materials cost (SC – AC) 3A
Other cost (SC – AC) (40×10)–450 50 A
Labour rate (SR – AR) × AH (60–(2 520/36))× 36 360 A
specialist
Labour rate (SR – AR) × AH (20-(1 134/63))× 63 126 F
support
Total labour rate 234 A
Labour efficiency (SH – AH) × SR ((4×10)–36) × 60 240 F
specialist
Labour efficiency (SH – AH) × SR ((5×10)–63) × 20 260 A
support
Total labour 20 A
efficiency
Labour cost (SC – AC) 254 A
AHSM – AHAM × SP
Specialist 44 – 36 × 60 = 480 F
Support 55 – 63 × 20 = 160 A
99 99 320 F
SHSM – AHSM × SP
Specialist (4 × 10) – 44 × 60 = 240 A
Support (5 × 10) – 55 × 20 = 100 A
340 A
33
Procedure Y

Materials price (SP – AP) × AQ (5–4.5) × 91 45.5 F
Materials usage (SQ – AQ) × SP ((5×22)–91) × 5 95.0 F
Materials cost (SC – AC) 140.5 F
Other cost (SC – AC) (50×22)–1 050 50 F
Labour rate (SR – AR) × AH (50–(9 000/180) × NIL
specialist 180
Labour rate (SR – AR) × AH (30– 794 A
support (5 558/158.8)×158.8
Total labour 794A
rate
Labour (SH – AH) × SR ((8×22)–180) × 50 200 A
efficiency
specialist
Labour (SH – AH) × SR ((6×22)–158.8) × 30 804 A
efficiency
support
Total labour 1 004 A
efficiency
Labour cost (SC – AC) 1 798 A
AHSM – AHAM × SP
Specialist 193.6 – 180 × 50 = 680 F
Support 145.2 – 158.8 × 30 = 408 A
338.8 338.8 272 F
SHSM – AHSM × SP
Specialist (8 × 22) – 193.6 × 50 = 880 A
Support (6 × 22) – 145.2 × 30 = 396 A
308 338.8 1 276 A
34
(b) Example Points:
 Cost of set up and operation
 Setting Standards (basic, ideal, attainable & current) and

behavioural consequences
 Measures of quality as important as variances
 Variability of patient needs
 Capacity/Availability of staff – Case mix and labour

interaction
 Pricing and costing for contracting applications and other

points, especially on public sector applicability.
35

(a) Standard Cost of the Techtron
Materials £
Material × (9kg × £7) 63.00
Material Y (3kg × £5.50) 16.50
Additional parts (£74.00/100 × 46) 34.04
Total materials 113.54
Labour - Skilled (£11.50 × 2.5) 28.75
Labour - Unskilled (£5.00 × 1.5) 7.50
Total labour 36.25
Variable overhead (4 hours × £3.75) 15.00
Fixed overhead (4 hours × £5.40) 21.60
Standard product cost 186.39
Flexed budgeted income statement for the Techtron to 30

Nov 2013
Item £
Actual volume at Standard Price (1 040 × 273) 283 920
Material × (£63 × 1 040) 65 520
Material Y (£16.50 × 1 040) 17 160
Additional parts (£34.04 × 1 040) 35 402
Labour - Skilled (28.75 × 1 040) 29 900
Labour - Unskilled (7.50 × 1 040) 7 800
Variable overhead (£15.00 × 1 040) 15 600
Fixed overhead (£21.60 × 1 100) 23 760
Surplus 88 778
36
(b) Calculation of variances

SPV (AP – SP) × AQs (275–273) × 1 040 2 080 F
MPV – X (SP – AP) × AQ (7–7.20) × 10 200 2 040 A
MPV – Y (SP – AP) × AQ (5.5–5.85) × 3 020 1 057 A
MPV – Parts (SP – AP) × AQ (0.74–0.76) × 50 800 1 016 A
MUV – X (SQ – AQ) × SP ((9×1 040)–10 200) × 5 880 A
7
MUV – Y (SQ – AQ) × SP ((3×1 040)–3 020) 550 F
× 5.5
MUV – Parts (SQ – AQ) × SP (46×1 040)–50 800) × 2 190 A
0.74
LRV – Skilled (SR – AR) × AH (11.5–11.75) × 3 020 755 A
LRV – Unskilled (SR – AR) × AH (5–4.9) × 1 590 159 F
LEV – Skilled (SH – AH) × SR ((2.5×1 040)–3 020) 4 830 A
× 11.5
LEV – (SH – AH) × SR ((1.5×1 040)–1 590) 150 A
Unskilled ×5
VExV (SR – AR) × AH (3.75–3.68) × 4 610 323 F
VEfV (SH – AH) × SR ((4×1 040)–4 610) 1 688 A
× 3.75
FExV BFO – AFO (5.4×4×1 100)– 1 687 A
25 447
37
Profit reconciliation statement
Favourable Adverse Cost

£’000 £’000 £'000
Flexed Budgeted Profit 88 778
Sales Price Variance 2 080
Material price – X (2 040)
Material usage – X (5 880)
Material cost - X (7 920)
Material price - Y (1 057)
Material usage – Y 550
Material cost – Y (507)
Material price – parts (1 016)
Material usage – parts (2 190)
Material cost – parts (3 206)
Labour rate – skilled (755)
Labour efficiency – skilled (4 830)
Labour cost – skilled (5 585)
Labour rate – unskilled 159
Labour efficiency – unskilled (150)
Labour cost – unskilled 9
expenditure
Variable overhead efficiency (1 688)
Variable overhead cost (1 365)
Fixed overhead expenditure (1 687)
Actual Profit 70 597
(c) Possible reasons for significant variances:
 Wastage of material X, possibly due to poor quality.
 Skilled labour working less efficiently than standard;
possibly linked to inferior quality materials.
 Unskilled labour paid less than the standard, therefore
were less efficient because they were less skilled.
38

(a) Budgeted total cost
£
Direct materials 4.5kg × £12 54
Direct labour Skilled 3 hours × £14 42
Direct labour Semi-skilled 1.5 hours × £8 12
Total direct costs 108
Overhead absorption rate:

Budgeted overhead ÷ Budgeted total labour hours
47 250 ÷ (1 500 × 4.5) = 6 750
Absorption rate per labour hour £7
Absorption rate per unit: 4.5 × 7 = £31.50
Total cost = £108.00 + £31.50 = £139.50
(b)

MPV (SP – AP) × AQ (12–(74 550/7 100)) × 10 650 F
7 100
MUV (SQ – AQ) × SP ((4.5×1 450)–7 100) × 6 900 A
12
LRV – (SR – AR) × AH (14–(70 110/4 275) × 10 260 A
Skilled 4 275
LRV – (SR – AR) × AH (8–(16 020/2 225) × 1 780 F
Semi– 2 225
skilled
LEV – (SH – AH) × ((3×1 450)–4 725) × 14 1 050 F
Skilled SR
LEV – (SH – AH) × ((1.5×1 450)–2 225) × 8 400 A
Semi– SR
Skilled
FExV BFO – AFO 47 250–52 025 4 775 A
FEfV (SH – AH) × ((4.5×1 450)–6 500) × 7 175 F
SR
FCV (AH – BH) × (6 500–(4.5×1 500)) × 7 1 750 A
SR
FVolV FEfV + FCV 175F + 1 750 A 1 575 A
 Materials price variance was favourable. This could indicate

a poorer quality of materials used, that in turn meant there
39
was more wastage. This was reflected in the materials

usage variance.
 Labour efficiency was favourable. This may have meant

that overall, more skilled labour was used that enabled the
work to be completed more quickly. This would be
consistent with the labour rate variance, which was
adverse, as skilled labour would earn a higher rate.
40

(a) Mean and standard deviation
Mean
n = 10
Σx = (469 + 526 + 498 + 536 + 472 + 569 + 502 + 509 + 485
+ 522)
= 5 088
So μ = 5 088/10 = 508.8 kg
This mean shows that during the first two weeks of the
production process the average usage of the key component is
508.8g per day.
If this can be assumed to be a fair reflection of the standard
usage of the machine then it can be used as the standard
quantity for the purposes of variance calculations.
Standard deviation
kg kg kg kg
x μ x–μ (x–μ)2
469 508.8 –39.8 1 584.04
472 508.8 –36.8 1 354.24
485 508.8 –23.8 566.44
498 508.8 –10.8 116.64
502 508.8 –6.8 46.24
509 508.8 0.2 0.04
522 508.8 13.2 174.24
526 508.8 17.2 295.84
536 508.8 27.2 739.84
569 508.8 60.2 3 624.04
Σ(x–μ)2 8 501.60
s = √(8 501.6/10) = 29.2kg
This standard deviation shows that when all the daily usage
records are compared with the mean usage, the average
variance from the mean is 29.2kg.
41
This suggests that about 68% of the recorded daily usage

figures will be within 29.2kg of the mean of 508.8kg and that
95% of them will be within 58.4kg.
(b) Usage variance
The standard daily usage is 509kg. The actual daily usage is
597kg.
The variance is therefore
(SQ – AQ)SP=(509kg – 597kg)× £5=£440 A
Since the budgeted usage is 509kg × £5 = £2 545, the variance
is £440 / £2 545 = 17.3% of budget and is therefore below
both the absolute investigation limit of £600 and the 20% of
budget approach.
However, the finding is 88kg above the average, and since
standard deviation is 29.2kg, it is just over 3 standard
deviations above the mean. Although such a result might occur
when the machine is working normally it is unusual (only 0.26%
of the daily usage records would be expected to be so high) and
management may therefore wish to investigate further.
42
77 Mansell Street
London E1 8AN
+ 44 (0)20 75435600
Email: [email protected]
Website: www.cipfa.org.uk
43

Cipfa WB4

Uploaded by

Copyright:

Available Formats

Cipfa WB4

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cipfa WB4

Uploaded by

Copyright:

Available Formats

MANAGEMENT ACCOUNTING

Updated January 2018

Valid for exams in 2018

First published 2015

Copyright © 2015 Chartered Institute of Public Finance and Accountancy

All rights reserved. No part of this publication may be reproduced, stored in

Exercise Solution 4.1

 Relevance – irrelevant information is not related to the decision

 Clarity – information that is not clear will not be understood,

 Timeliness – in order to be of use, the information must be

 Reliability –information should be as accurate as required,

 Completeness – information should provide an understanding of

Exercise Solution 4.2

 Sales: Variable Income – 200 000 units × 65% × £15

 Materials: Variable – £3 per unit

 Wages: Semi-Variable – £15 000 Fixed + £4 per unit

 Production Overhead: Semi-Variable – £10 000 Fixed + £2

 Administration: £50 000 Fixed Cost

 Selling: Semi-Variable – £10 000 Fixed + £0.80 per unit

 Distribution: Semi-Variable – £5 000 Fixed + £1 per unit

 Non-manufacturing overhead: Semi-Variable – £25 000

deviations and capitalise further on any favourable

Exercise Solution 4.3

 Materials cost variance

Should have cost 1 100 × 2.8kg × £4.80 per kg = £14 784

 Materials price variance (SP-AP) × AQ

 Materials usage variance (SQ-AQ) × SP

 Labour cost variance

Should have cost 1 100 × 6.4 hours × £3.75 = £26 400

 Labour rate variance (SR-AR) × AH

 Labour efficiency variance (SH-AH) × SR

Exercise Solution 4.4

 Materials Cost Variance

 Materials Price Variance (SP-AP) × AQ

 MPV = (£4.80 - {15,700 / 3,200}) * 3,200

MPV = (4.80 * 3,200) - 15,700

MPV = 15,360 - 15,700 = 340 Adverse

 Materials Usage Variance (SQ-AQ) × SP

 Labour Cost Variance

 Labour Rate Variance (SR-AR) × AH

 Labour Efficiency Variance (SH-AH) × SR

Exercise Solution 4.5

 Materials cost variance

 Materials price variance (SP-AP) × AQ

 Materials usage variance (SQ-AQ) × SP

 Labour cost variance

 Labour rate variance (SR-AR) × AH

 Labour efficiency variance (SH-AH) × SR

Exercise Solution 4.6

materials cost variance. The materials cost variance is also

Material Standard cost Actual cost Variance

Material AQSM AQAM SP Variance

Material SQSM AQSM SP Variance

Exercise Solution 4.7

Variance Formula Variance

Material SQSM AQSM SP Variance

Material SQSM AQSM SP Variance

Exercise Solution 4.8

Variance Favourable Adverse Cost