REVIEW QUESTIONS

Question one
The following standard costs apply in a business that manufactures a single product.
Standard weight to produce one unit 12 kgs
Standard price per kg shs 9
Standard hours to produce one unit 10hrs
Standard rate per hour shs 4
Actual production and costs for one accounting period (when output was 290 units)
were as follows:

Material used 3,770 kgs

Material cost shs 35,815
Hours actually worked 2,755hrs
Hours paid for 2,900hrs
Wages paid shs 11,571
Required; Calculate
(i) Material usage variance
(ii) Material price variance
(iii) Labour efficiency variance
(iv) Labour rate variance

Question two
Quayle Products plc manufactures waste disposal units. Its sales and costs budget for
November 20X2 is as follows:
Shs
Sales: 3000 units × Shs72 216 000
Costs
Direct materials (metal) 3000 × (1kg × Shs14) (42 000)
Direct materials (plastic) 3000 × (Shs0.5kg × Shs7) (10 500)
Direct labour: 3000 × (0.75 hours × Shs8) (18 000)
Production overhead (86 500)
59 000
Other overheads (31 000)
Net profit 28 000

The company does not absorb production overheads using an overhead absorption rate. It
may be assumed that all of its overheads are fixed in nature. The company’s actual results for
the month are as follows:

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 Shs
Sales: 2950 units × Shs73 215 350
Costs:
Direct materials (metal) 2950 × (0.9kg × Shs13.80) (36 639)
Direct materials (plastic) 2950 × (Shs0.5kg × Shs7.20) (10 620)
Direct labour: 2950 × (0.7 hours × Shs8.20) (16 933)
Production overhead (84 250)
66 908
Other overheads (32 250)
Net profit 34 658

You are required to:

a) Calculate:
i. Sales profit volume variance
ii. Sales price variance
iii. Materials price variance (for both metal and plastic)
iv. Materials quantity variance (for both metal and plastic)
v. Direct labour rate variance
vi. Direct labour efficiency variance
vii. Overheads variances

b) Prepare a standard cost operating statement

c) Suggest reasons for any price variances you have calculated.

Question three
Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a
relatively simple process, removes the outer husk of the rice to produce the brown rice. This
means that there is substantial loss of weight in the process. The market for the purchase of
seeds and the sales of brown rice has been, and is expected to be, stable.
Chaff Co uses a variance analysis system to monitor its performance.
There has been some concern about the interpretation of the variances that have been
calculated in month 1.
1. The purchasing manager is adamant, despite criticism from the production director,
that he has purchased wisely and saved the company thousands of dollars in
purchase costs by buying the required quantity of cheaper seeds from a new supplier.

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2. The production director is upset at being criticised for increasing the wage rates for
month 1; he feels the decision was the right one, considering all the implications of the
increase. Morale was poor and he felt he had to do something about it.
3. The maintenance manager feels that saving Shs8,000 on fixed overhead has helped the
profitability of the business. He argues that the machines’ annual maintenance can
wait for another month without a problem as the machines have been running well.
The variances for month 1 are as follows:

Shs
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Variable overhead expenditure 18,000 (Adv)
Variable overhead efficiency 30,000 (Fav)
Fixed overhead expenditure 8,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)

Fav = Favourable, Adv = Adverse

Chaff Co uses labour hours to absorb the variable overhead.

Required:
a) Comment on the performance of the purchasing manager, the production
director and the maintenance manager using the variances and other
information above and reach a conclusion as to whether or not they have each
performed well.

In month 2 the following data applies:

Standard costs for 1 tonne of brown rice
 1·4 tonnes of rice seeds are needed at a cost of Shs60 per tonne
 It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is
normally paid Shs18 per hour. Idle time is expected to be 10% of hours paid;
this is not reflected in the rate of Shs18 above.
 2 hours of variable overhead at a cost of Shs30 per hour
 The standard selling price is Shs240 per tonne
 The standard contribution per tonne is Shs56 per tonne

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 Budget information for month 2 is
 Fixed costs were budgeted at Shs210,000 for the month
 Budgeted production and sales were 8,400 tonnes

The actual results for month 2 were as follows:

 Actual production and sales were 8,000 tonnes
 12,000 tonnes of rice seeds were bought and used, costing Shs660,000
 15,800 labour hours were paid for, costing Shs303,360
 15,000 labour hours were worked
 Variable production overhead cost Shs480,000
 Fixed costs were Shs200,000
 Sales revenue achieved was Shs1,800,000
Required:
b) Calculate the variances for month 2 in as much detail as the information allows
and reconcile the budget profit to the actual profit using marginal costing
principles. You are not required to comment on the performance of the business
or its managers for their performance in month 2.

Question four
Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour
using mainly traditional manual techniques. The manufacturing department is a cost centre
within the business and operates a standard costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the
bats by sourcing wood from a new supplier and de-skilling the process a little by using lower
grade staff on parts of the production process. The standards were not adjusted to refl ect
these changes.

The variance report for April 2010 is shown below (extract).

Adverse Favourable
Variances Shs Shs
Material price 5,100
Material usage 7,500
Labour rate 43,600
Labour efficiency 48,800
Labour idle time 5,400
The production director pointed out in his April 2010 board report that the new grade of
labour required significant training in April and this meant that productive time was lower
than usual. He accepted that the workers were a little slow at the moment but expected that
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an improvement would be seen in May 2010. He also mentioned that the new wood being
used was proving difficult to cut cleanly resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the
previous month. The sales director resigned after the board meeting stating that SW had
always produced quality products but the new strategy was bound to upset customers and
damage the brand of the business.
Required
a) Assess the performance of the production director using all the information above
taking into account both the decision to use a new supplier and the decision to de-
skill the process.

In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows:
Std cost Std cost
Shs Shs
Materials (2kg at Shs5/kg) 10
Labour (3hrs at Shs12/hr) 36
Marginal cost 46
Selling price 68
Contribution 22

In May 2010 the following results were achieved:

40,000kg of wood were bought at a cost of Shs 196,000, this produced 19,200 cricket bats. No
inventory of raw materials is held. The labour was paid for 62,000 hours and the total cost
was Shs 694,000. Labour worked for 61,500 hours.
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats
were sold at an average price of Shs 65.
Required:
b) Calculate the materials, labour and sales variances for May 2010 in as much detail
as the information allows. You are not required to comment on the performance of
the business.

Question five
Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer.
All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer.
The standard cost of labour for each batch is Shs 6.00 and the standard labour time for each
batch is half an hour. In November, Truffle Co had budgeted production of 24,000 batches;

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actual production was only 20,500 batches. 12,000 labour hours were used to complete the
work and there was no idle time. All workers were paid for their actual hours worked. The
actual total labour cost for November was Shs 136,800. The production manager at Truffle Co
has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the
choice of either accepting a 5% pay cut or facing a certain number of redundancies. All staff
subsequently agreed to accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change
was implemented immediately and made the chocolates more difficult to shape. When
recipe changes such as these are made, it takes time before the workers become used to
working with the new ingredient mix, making the process 20% slower for at least the first
month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever
made to the system outside of this.
Required:
a) Calculate the total labour rate and total labour efficiency variances for November,
based on the standard cost provided above.
b) Analyse the total labour rate and total labour efficiency variances into component
parts for planning and operational variances in as much detail as the information
allows.
c) Assess the performance of the production manager for the month of November.

Question six
Selly Watkins plc makes bathroom fittings. The directors have monthly board meetings at
which, amongst other things, they discuss the most recent standard cost operating statement.
The statement for April 20X3 reads as follows:
Total
Shs
Original budgeted net profit 216 760
Sales profit volume variance 5 866
Flexed budget net profit 222 616

Other variances: Favourable (Adverse)

Shs Shs
Sales price variance (2 689)
Direct materials price variance 8 760
Direct materials quantity variance (9 989)

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Direct labour rate variance — —
Direct labour efficiency variance 660
Variable overhead variance (8 828)
Fixed overhead variance (9 771)
Total 9 420 (31 277) (21 857)
Actual net profit 200 769

The directors are concerned that the net adverse variance for the month is more than 10% of
the original budgeted net profit. They call in the management accountant for some
explanations. He comes up with the following points:
1. The sales team decided to raise prices in the middle of April and we haven’t yet
adjusted the standard prices to reflect
2. We obtained a really good quantity discount on materials from a new supplier.
3. The materials quantity variance is due to the fact that the materials we’ve bought in
recently have been of higher quality than we originally anticipated.
4. The labour efficiency variance probably arises because the new production line staffs
we took on in April are really very efficient workers.
5. The overhead variances are unfortunate, but the problem really is that we
underestimated the level of both fixed and variable overheads when we were setting
the original budget.

Three of these explanations are quite plausible; two are not.

Required: identify which explanations for the variances that have occurred in April 20X3 are
plausible and which are implausible.

Question seven
RS Ltd makes and sells a single product, J, with the following standards specification for
materials
Quantity (kgs) Price per Kilogram (shs)
Direct material R 10 30
Direct material S 6 45

It takes 30 direct hours to produce one unit of J with a standard direct labour cost of shs 5.50
per hour. The annual sales/production budget is 1,200 units evenly spread throughout the
year. The budgeted production overhead, all fixed, is shs 252,000 and expenditure is
expected to occur evenly over the year, which the company divides into twelve calendar
months. Absorption is based on units produced.

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For the month of October the following actual information is provided. The budgeted sales
quantity for the month was sold at the standard selling price.

Shs Shs

Sales 120,000
Cost of sales:
Direct material used 58,136
Direct wages 17,325
Fixed production overhead 22,000 97,461
Gross profit 22,539
Administration costs 6,000
Selling and distribution costs 11,000 17,000
Net profit 5,539
Costs of opening stocks, for each material, were at the same price per kilogram as the
purchases made during the month but there had been changes in the materials stock levels;
1 October 30 October
Kgs kgs
Material R 300 375
Material S 460 225

Material R purchases were 1,100 Kgs for shs 35,000

Material S purchases were 345 Kgs for shs 15,180.
The number of direct labour hours worked was 3,300 and the total wages incurred shs
17,325.
Work-in-progress stocks and finished goods stocks may be assumed to be the same at the
beginning and end of October.

You are required:

(a) To present a standard product cost for one unit of product J showing the standard
selling price and standard gross profit per unit.

(b) To calculate appropriate variances for materials, labour, and fixed production
overhead, noting that it is the company policy to calculate material price variances at
time of issue to production.

(c) To present a statement for management reconciling the budgeted gross profit with the
actual gross profit.

(d) To suggest a possible cause for each labour variances you shown under (b) above.

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Question eight
The following profit reconciliation statement has been prepared by the Cost Accountant of
SHSQ Ltd. for March, 2008:

Shs
Budget profit 240,000
Sales price variance 51,000 (F)
Sales volume profit variance 42,000 (A)
249,000
Material price variance 15,880 (A)
Material usage variance 3,200 (F)
Labour rate variance 78,400 (F)
Labour efficiency variance 32,000 (A)
Variable overhead expenditure variance 8,000 (F)
Variable overhead efficiency variance 12,000 (A)
Fixed overhead volume variance 196,000 (A)
Fixed overhead expenditure variance 4,000 (F)
Actual profit 86,720

Budgeted production and sales volumes for March, 2008 were equal and the level of
finished goods stock was unchanged, but the stock of raw materials decreased by
6,400 kg (valued at standard price) during the month.

The standard cost card is as under:

Material 4 kg @ Shs 2.00 8.00
Labour 4 hours @ Shs 32.00 128.00
Variable overhead
(4 hours @ Shs 12.00) 48.00
Fixed overheads
(4 hours @ Shs 28.00) 112.00
296.00
Standard profit 24.00
Standard selling price 320.00

The actual labour rate was Shs 2.24 lower than the standard hourly rate.

You are required to calculate:

i. Actual quantity of material purchased
ii. Actual production and sales volume

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 iii. Actual number of hours worked
iv. Actual variable and fixed overhead cost incurred.

Question nine
The board has asked that the variances be calculated for Month 4. In Month 4 the production
department data is as follows:
Actual results for Month 4
Liquidised vegetables: Bought 82,000 litres costing Shs 69,700
Melted butter: Bought 4,900 litres costing Shs 21,070
Stock: Bought 122,000 litres costing Shs 58,560

Actual production was 112,000 litres of soup

Required:
Calculate the material price, mix and yield variances for Month 4. You are not required to
comment on the performance that the calculations imply. Round variances to the nearest Shs

Question ten
The market for leather bound diaries has been shrinking as the electronic versions become
more widely available and easier to use. Spike Co has produced the following data relating
to leather bound diary sales for the year to date:

Budget
Sales volume 180,000 units
Sales price Shs17·00 per unit
Standard contribution Shs7·00 per unit

The total market for diaries in this period was estimated in the budget to be 1·8m units. In
fact, the actual total market shrank to 1·6m units for the period under review.

Actual results for the same period

Sales volume 176,000 units
Sales price Shs16·40 per unit

Required:
a) Calculate the total sales price and total sales volume variance.
b) Analyse the total sales volume variance into components for market size and market
share.
c) Comment on the sales performance of the business.
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Question eleven
Coope and Sorcerer Co make product T42 in a continuous process, for which standard and
actual quantities in month 10 were as follows.

Standard Actual
Price Price Std cost of
Quantity per kg Value Quantity per kg actual usage
kg Shs Shs kg Shs Shs
Material P 40,000 2.50 100,000 34,000 2.50 85,000
Material Q 20,000 4.00 80,000 22,000 4.00 88,000
60,000 180,000 56,000 173,000

Losses occur at an even rate during the processing operation and are expected to be 10% of
materials input. Actual output during the month was 53,000 kgs.

Required
Calculate total usage, mix and yield variances.

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