Standard Costing 3 -...

After studying this chapter, you should be able to

Describe how unit input standards are developed, and explain why standard costing systems are adopted.

Explain the purpose of a standard cost sheet.

Compute and journalize the direct materials and direct labour variances, and explain how they are used for control.

Compute overhead variances in three different ways, and explain overhead accounting.

Calculate mix and yield variances for direct materials and direct labour.

Standard Costing

Learning Objectives

3

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3.2 Problems and Solutions: Advanced Management Accounting

INTRODUCTORY THEORYStandard costing system is a costing system that: (i) traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities

of inputs allowed for actual output produced, and (ii) allocates overhead costs on the basis of the standard overhead – costs rates times the standard quantities of

the allocation bases allowed for the actual outputs produced.

Establishing StandardsDeveloping and establishing standards requires signifi cant inputs from various sources. Three potential sources of quantitative standards are as follows: 1. Historical experience 2. Engineering studies 3. Input from operating personnel

Classifi cation of Standards

Ideal Standards↓

Can be achieved only if everything operates perfectly

and demands maximum level of effi ciency

Basic Standards↓

Used only when they are likely to remain constant over a long

period of time

Normal Standards↓

Can be achieved under normal operating conditions

Standards

Standard cost is a carefully determined cost of a unit of output. According to CIMA offi cial terminology standard cost is: “A predetermined calculation of how much costs should be under specifi ed working conditions. It is built up from an assessment of the value of cost elements and correlates technical specifi cations and the qualifi cation of minerals, labour and other costs to the prices and/or usage rates expected to apply during the period in which the standard cost is intended to be used. Its main purpose is to provide basis for control through variance accounting for the valuation of stock and work-in-progress and in some cases, for fi xing selling prices.”

Objectives for Adopting Standard Costing System 1. Cost Management 2. Planning and Control 3. Decision-making 4. Product Costing

Variance Analysis and Accounting

Variance analysis is the analysis of the cost variances and its component parts and explanation of these variances. Cost variance is the difference between a standard cost and the comparable actual cost incurred during a period.

Classifi cation of VariancesDirect Material Price Variance = Actual Quantity (Standard Price – Actual Price)Direct Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity)


Standard Costing 3.3

Variances

Uncontrollable↓

(i) Which are beyond the control of departmentl heads, e.g. price

Controllable↓

Which can be controlled by the departmental head

Timing of Price Variance ComputationThe direct material price variance can be computed at one of two points: 1. When the direct materials are issued for use in production, or 2. When they are purchased. Computing the price variance at the point of purchase is preferable. It is better to have information on variances earlier than later. The more timely the information, the more the likeliness of a proper managerial action.

Timing of the Computation of the Direct Material Usage VarianceThe direct material usage variance should be computed as direct materials are issued for production. To facilitate this process, many companies use three forms: 1. A standard bill of materials, 2. Color-coded excessive usage forms, and 3. Color-coded returned – material forms.Direct Labour Rate Variance = Actual Time × (Standard Rate – Actual Rate)Direct Labour Effi ciency Variance = Standard Rate × (Standard Time – Actual Rate)

Responsibility for the Direct Material VariancesThe responsibility for controlling the direct material price variance is usually lies with the purchasing manager. The production manager is responsible for direct material usage. However, at times, the cause of the variance is attributable to other individuals and factors outside the production area. For example, purchase of low quality direct material may give a bad output. In this case, the responsibility should be assigned to purchasing rather than production.

Responsibility for the Direct Labour VariancesDirect labour rates are largely determined by such external forces as labour market and union contracts. When direct labour rate variances occur, they often do so because an average wage rate is used for the rate standard or because more skilled and more highly paid labourers are used for less skilled task. However, the use of direct labour is controllable by the production manager. For this reason, responsibility for the direct labour rate variance is generally assigned to the individuals who can take good decision for allocation of labour. The same is true of the direct labour effi ciency variance. However, as is true of all variances, once the cause is discovered, responsibility may be assigned elsewhere.

Variable Overhead Effi ciency VarianceThe variable overhead effi ciency variance is directly related to the direct labour effi ciency variance. If variable overhead is truly driven by direct labour hours, then like the direct labour effi ciency variance, it is caused by effi cient or ineffi cient use of direct labour. If more (or fewer) direct labour hours are used the standard calls for then the total variable cost will increase (or decrease).

Responsibility for Variable Overhead Expenditure Variance and Variable Overhead Effi ciency VarianceAbility to control is a prerequisite for assigning responsibility. Price changes of variable overhead items are generally beyond the control of supervisors. If price changes are small, the expenditure variance is primarily a matter of the



effi cient use of overhead in production, which is controllable by production supervisors. Accordingly, responsibility for the variable overhead expenditure variance is generally assigned to production departments. The reasons for unfavourable variable overhead variance are similar to direct labour effi ciency variance. Responsibility for the variable overhead effi ciency variance should be assigned to the production manager.

Variance Analysis Overhead Costs 1. Variable Overhead Variance = (Standard Variable Overhead – Actual Variable Overhead) 2. Variable Overhead Expenditure Variance = (Budgeted Variable Overhead for Actual Hours – Actual

Variable Overhead) 3. Variable Overhead Effi ciency Variance = Standard Variable Overhead Per Hour × (Standard Hours for

Actual Output – Actual Hours)

Variable Overhead Expenditure VarianceIt is similar to the price variances of direct materials and direct labour though there some conceptual differences. Variable overhead is not a homogenous input – it is made up of a large number of individual items such as indirect materials, indirect labour, electricity, maintenance, and so on. A variable overhead expenditure variance can arise because prices for individual variable items have increased or decreased. The variable overhead expenditure variance is also affected by how effi ciently overhead is used. The waste or ineffi ciency in the use of variable overhead increases the actual variable overhead cost. This increased cost, in turn, is refl ected in an increased actual variable overhead rate. Thus, even if the actual prices of the individual overhead items were equal to the budgeted or standard prices, an unfavourable variable overhead expenditure variance could still take place.

Fixed Overhead Variances 1. Total Fixed Overhead Variance = Absorbed Fixed Overhead – Actual Fixed Overhead 2. Fixed Overhead Expenditure Variance = Budgeted Overhead – Actual Overhead 3. Fixed Overhead Volume Variance = Standard Rate of Absorption Per Unit × (Actual Production – Budgeted

Production) 4. Fixed Overhead Capacity Variance = Standard Rate of Absorption Per Hour × (Actual Hours Capacity –

Budgeted Hours Capacity) 5. Fixed Overhead Effi ciency Variance = Standard Rate of Absorption Per Hour × ( Standard Hours Required

– Actual Hours)

AFOH

BFOH

SFOR × SH

SH SH D( )

SpendingVariance

VolumeVariance

Standard Hours

Graphical representation of fi xed overhead variances



Direct Material Mix and Yield VarianceThe mix variance is the difference in the standard cost of the actual mix of inputs used and the standard cost of the mix of inputs that should ideally have been used. A yield variance occurs whenever the actual yield (output) differs from the standard yield. For direct materials, the sum of the mix and yield variances equals the direct material usage variance. Direct Material Mix Variance = Total Actual Quantity × (Standard Cost Per Unit of Standard Mix – Standard Cost Per Unit of Standard Mix)or, Standard Price × (Revised Actual Quantity – Actual Quantity)Direct Material Yield Variance = Standard Price of Yield × (Actual Yield – Standard Yield)or, Standard Price × (Standard Quantity – Revised Actual Quantity)

Direct Labour Mix and Yield VarianceThe direct labour mix and yield variance is calculated in the same way as the direct material mix and yield variance.Direct Labour Mix Variance = Total Actual Time × (Standard Rate of Standard Labour – Standard Rate of Actual Labour)or, (Revised Actual Hours – Actual Hours) × Standard RateDirect Labour Yield Variance = Standard Rate × (Total Standard Time –Total Actual Time)or, Standard Rate × ( Standard Hours – Revised Actual Hours)

Question 1: Calculate Material Price Variance and Material Usage Variance:Standard (1 FG) Actual (1 FG)

Kg Rate Amount (`) Kg Rate Amount (`)18,000 10 1,80,000 20,000 12 2,40,000

5,000 20 1.00.000

Advantages and Disadvantages of Standard CostingAdvantages:

■ Basis for measuring operating performance and cost control ■ Helps in price fixation ■ Facilitates evaluation of jobs ■ Facilitates estimation of cost of new product ■ Helps in inventory valuation ■ Useful in measurement of profit ■ Supports business planning, budgeting and managerial decisions ■ Aids in standardization of products, operations and processes ■ Defines the responsibilities of departmental managers ■ Sets a uniform basis for comparison of all elements of costs.

Disadvantages: ■ Variation in price ■ Varying level of output ■ Changing standard of technology ■ Misleads technical people ■ Revision of standard ■ Cannot reflect value in exchange.

Points to RememberPoints to Remember



After analysing, it was found that out of 25,000 unit, 5,000 units were purchased as an emergency order at higher rate @ ` 20.

Solution:Material Price Variance = (S.P. – A.P.) × A.S. = (10 – 12) × 20,000 + (10 – 12) × 5,000 = ` 50,000 AdverseMaterial Usage Variance = Excess price variance + (S.Q. – A.Q.) × S.P. due to emergency order = (12 – 20) × 5,000 + (18,000 – 25,000) × 10 = ` 1,10,000

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 kgActual: Output 2,10,000 kgMaterials used 2,80,000 kg

Cost of materials ` 2,52,000

Calculate (a) Material Usage Variance (b) Material Price Variance (c) Material Cost Variance.

Solution:Data for Material Variance (2,10,000 kg)

Standard (Output 2,10,000 kg) Actual (Output 2,10,000 kg)Qty. Rate Amount (`) Qty. Rate Amount (`)

3,00,000 kg 1 3,00,000 2,80,000 0.90 2,52,000

Statement of VarianceSl. No. Particulars Basis Amount (`)

1. Material Usage Variance (Std.Qty. – A.Qty.) × S.P.(3,00,000 – 2,80,000) × 1

20,000 Favourable

2. Material Price Variance (S.P. – A.P.) × A.S.(1 – 0.90) × 2,80,000

28,000 Favourable

3. Material Cost Variance (Material Usage + Material Price Variance) i.e. SC–AC

48,000 Favourable

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 ProductRaw material Standard Actual

A 40 units @ ` 50 per unit 50 units @ ` 50 per unit B 60 units @ ` 40 per unit 60 unit @ ` 45 per unit

Solution:

Data for Material Variances

Standard ActualItem Qty. Rate Amount (`) Item Qty. Rate Amount (`)

A 40 50 2,000 A 50 50 2,500

B 60 40 2,400 B 60 45 2,700

4,400 110 5,200



Statement of VariancesSl. No. Particulars Basis Amount (`)

1. Material Price Variance (S.P. – A.P.) × A.Q.A → (50 – 50) × 50 = 0B → (40 – 45) × 60 = 300 Adverse 300 (Adverse)

2. Material Usage Variance (S.Q – A.Q.) × S.RA → (40 – 50) × 50 = 500B → (60 – 60) × 40 = 0

500 (Adverse)

Material Cost Variance = Material Price Variance + Material Usage Variance = 300 A + 500 A = ` 800 (Adverse)ORMaterial 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. Standard Actual

Quantity (Kg)

Unit Price(`)

Total (`)

Quantity (Kg)

Unit Price (`)

Total (`)

Material A 10 2.00 20.00 5 3.00 15.00

Material B 20 3.00 60.00 10 6.00 60.00

Material C 20 6.00 120.0 15 5.00 75.00

Total 50 4.00 200.00 30 5.00 150.00

Solution:Data for Material Variance

Budgeted/Standard (1 FG) Actual (1 FG)■ Amount (`) Item Qty. Rate Amount (`)

A 10 2 20 A 5 3 15B 20 3 60 B 10 6 60C 20 6 120 C 15 5 75

200 110 150


1. Material Price Variance (S.R. – A.R.) × AQA → (2 – 3) × 5 = 5 AdvB → (3 – 6) × 10 = 30 AdvC → (6 – 5) × 15 = 15 Fav

20 (Adverse)

2. Material Usage Variance (S.Q. – A.S.) × S.R.A → (10 – 5) × 2 = 10FB → (20 – 10) × 3 = 30FC → (20 – 15) × 6 = 30F

70 Favourable

3. Material Cost Variance M.P.V. + M.U.V.20 Adverse + 70F 50 Favourable

Question 5: Mixers Ltd. is engaged in producing a ‘standard mix’ using 60 kgs of chemical X and 40 kg of chemical Y. The standard loss of production is 30%. The standard price of X is ` 5 per kg and of Y is ` 10 per kg. The actualmixture and yield were as follows:



X 80 kgs @ ` 4.50 per kg and Y 70 kgs @ ` 8.00 per kg. Actual yield is 140 kgs. Calculate material variances, price and usage.

Solution:Data of Material Variance

Raw MaterialBudgeted Standard Actual

Qty. Rate Amount (`)

Qty. Rate Amount Qty. Rate Amount (`)

X 60 5 300 120 5 600 80 4.5 360Y 40 10 400 80 10 800 70 8 560

100 kg 700 200 1,400 150 920


1. Material Price Variance(M.P.V.)

(S.P. – A.P.) × A.Q.X → (5 – 4.5) × 80 = 40FY→ (10 – 8) × 70 = 140F 180F

2. Material Usage Variance(M.U.V.)

(S.Q. – A.Q.) × S.R.X → (120 – 80) × 5 = 200FY → (80 – 70) × 3 = 100F 300F

3. Material Cost Variance M.P.V. + M.U.V. = SC – AC 480F

Question 6: Standard Chemical Co. Ltd produces a certain chemical, the standard material cost being: 40% material X at ` 45 per kg 60% material Y at ` 120 per kg A standard loss of 10% is expected in production. During January 1995, 200 kg of material X and Y were mixed: 84 kg material X at ̀ 46 per kg, 116 kg material Y at ̀ 118 per kg and produced 182 kg of the chemical. Calculate the following variance for the month: (i) Material Price; (ii) Material; (iii) Material


MaterialBudgeted (90 FG) Standard (182 FG) Actual (182 FG)




X 40 kg 20 1,200 80.88 20 1,618 90 18 1,630Y 60 kg 30 1,800 121.33 30 3,640 110 34 3,740

100 3,000 202.2 (WI) 5,258 200 5,360



(S.P. – A.P.) × A.Q.X → (20 – 18) × 90 = 180FY→ (30 – 34) × 110 = 440(A) 260 (A)


(S.Q. – A.Q.) × S.R.X → (80.88 – 90) × 20 = 182.4(A)Y → (121.33 – 110) × 30 = 340F 157F

3. Material Cost Variance M.P.V. + M.U.V.(SC – AC)260A + 157.50 F

102 (A)



For WI For 90 we need input = 100

For 1 we need input = 100 ____ 90 × 182

= 202.2 40% of 202.2 = 80.88 60% of 202.2 = 121.33

Question 7: 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 kgA 40% ` 4.00B 60% ` 3.00

The standard loss in processing is 15%. During April, 1980, the company produced 1,700 kg of fi nished output. The position stock and purchases for the month of April, 1980 is as under:

Material Stock on 1.4.80 ofkg

Stock on 30.4.80kg

Purchased during April 1980kg Cost (`)

A 35 5 800 3,400B 40 50 1,200 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.Solution:

Data for Material Variances

MaterialBudgeted Standard Standard

for Actual Actual




A 40 4 160 800 4 3,200 808 830 4.2394 3,518.75B 60 3 180 1200 3 3,600 1212 1,190 2.5168 2,995

100 340 6800 2,020 6,513.75


1. Material Price Variance (S.R. – A.R.) × A.Q.A → (4 – 4.2394) × 830 = 199AB → (3 – 2.5168) × 1190 = 575F 376 (Fav.)

2. Material Usage Variance (S.Q. – A.Q.) × S.R.A → (800 – 830) × 4 = 120A B → (1200 – 4190) × 3 = 30F 90 (Adv.)

3. Material Yield Variance (Standard Ratio for total standard quantity – Standard ratio for total actual quantity) × S.R.A → (800 – 808) × 4 = 32A B → (1200 – 1212) × 3 = 36F 68 (Adv.)

4. Material Mix Variance (Standard Ratio for actual mix – Actual ratio for actual mix) × S.R.A → (808 – 830) × 4 = 88A B → (1212 – 1190) × 3 = 66 Fav. 22 (Adv.)

5. Material Cost Variance Material price variance + Material Usage Variance376 Fav. + 90 Adv.

286 (Fav.)



Material A → ` 35 × 4 + 795 × 4.25 _________________ 35 + 795

= ` 3518.85 _______ 830 = 4.239

Material B → 40 × 3 + 1150 × 2.5 _______________ 40 + 1150 = ` 2995 ____ 1190

= ` 2.5168

Question 8: 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)A 600 1B 400 2C 500 3

During December 1991, eight mixes were processed and actual materials consumed were as follows:

Direct Materials Qty. (kg) Price (` per kg)A 5,000 2 B 2,900 4C 4,400 5

Actual production for December was 6,20,000 tiles.

Solution:

Data for Material Variance

MaterialsBudgeted (80,000) Standard (6,20,000) S.Q. for Act. Mix Actual (6,20,000)

Qty. Rate Amount(`)

Qty. Rate Amount(`)

Qty. Qty. Rate Amount(`)

A 600 1 600 4650 1 4,650 4,920 5,000 2 10,000B 400 2 800 3100 2 6,200 3,280 2,900 4 11,600C 500 3 1,500 3875 3 11,625 4,100 4,400 5 22,000

1,500 2,900 22,476 12,300 43,600

Statement of VarianceSl. No. Particulars Basis Amount


(S.R. – A.R.) × A.Q.A → (1 – 2) × 5000 = 5000AB → (2 – 4) × 2900 = 5800FC → (3 – 5) × 4400 = 8800A

19,600 (Adv.)


(S.Q. – A.Q.) × S.R.A → (4650 – 5000) × 1 = 350A B → (3100 – 2900) × 2 = 400FC → (3875 – 4400) × 3 = 1575A 1,525 (Adv.)



3. Material Mix Variance (S.Q. for actual mix – Actual Quantity) × S.R.A → (4920 – 5000) × 1 = 80Adv. B → (3280 – 2900) × 2 = 750FC → (4100 – 4400) × 3 = 900A

220 (Adv)

4. Material Yield Variance (standard quantity – Standard ratio for actual quantity) × S.R.A → (4650 – 4920) × 1 = 270A B → (3100 – 3280) × 2 = 360AC → (3875 – 4100) × 3 = 675A

1,305 (Adv)

5. Material Cost Variance M.P.V. – M.U.V.19,600 A + 1525 A 21,125 (Adv.)

Working Note

Calculation of Budgeted No. of Tiles

No. of Tiles = A

__

a =

20,000 Sq. ft

___________

6 × 6 sq. in. =

×20,000 12 × 124

sq.inch36 3 sq.inch

= 80,000 units

Question 9: From the data given below, calculate:Particulars X Y

Qty. (kg) Value Qty. (kg) ValueRaw material purchases 2,000 kg ` 4,000 5,000 ` 6,250Issue to works 2,150 kg — 3,950 —Works stock of material: Opening Closing

300 kg 200 kg

——

1,0001,250

——

Standard Price: Material X – ` 1.90 per kg, Material Y – ` 1.30 per kg.Standard Usage: Material X Material YProduct A 1 kg 1 kgProduct B 0.5 kg 1 kgOutput 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.

Solution:Data for material variance

Raw MaterialBudgeted/Standard Standard

Qty. (W.N. 1) Rate Amount (`) Qty. (W.N. 2) Rate Amount (`)X 2,405 1.90 4,569.5 2,250 2 4,500Y 3,680 1.30 4,784 3,700 1.25 4,625


1. Material Price Variance (S.R – A.R.) × A.Q. purchaserMaterial X → (1.90 – 2) × 2,000 Material Y → (1.30 – 1.25) × 5,000

200 (Adv.)250 (fav.)

2. Material Usage Variance (S.Q – A.Q.) × S.R.Material X → (2,405 – 2,250) 1.90Material Y → (3,680 – 3,700) 1.30

294.50 (Fav.)26 (Adv.)



Working Note 1:Calculation of Standard Quantity of Raw Material RequiredMaterial X → No. of products × Material required for/unit of product = 1,130 × 1 + 2,550 × 0.5 = 1,130 + 1,275 = 2,405 kgMaterial Y = 1,130 × 1 + 2,250 × 1 = 3,680 kgWorking Note 2:Calculation of Actual Quantity Consumed

Material X (kg) Y (kg)Opening Stock at works 300 1,000Issue to works by purchase department 2,150 3,950

(–) Closing stock at works 200 1,250Actual consumption 2,250 3,700

Question 10 (Break up of Material Cost Variances when standard mix and actual usage are given): ‘X’ Ltd is producing fl oor 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 fi xed for a batch of 900 sq. m of fl oor cover is as follows:2,000 kg of material A at ` 1.00/kg800 kg of material B at ` 1.50/kg20 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/kg1,19,600 kg of material B at ` 1.65/kg3,100 gallons of material C at ` 29.50/gallon.Present the fi gures to management showing the break-up of material cost variances arising during the period.

Solution: Data for Variance

Budgeted ActualQ R A Q R A

A 2,000 1 2,000 3,00,500 1.1 3,30,550B 800 1.5 1,200 1,19,600 1.65 1,97,340C 20 30 600 3,100 29.5 91,45010 FG 3,800 150.5 lot FG 6,19,340

StandardQ R A

A 3,01,000 1 3,01,000B 1,20,400 1.5 1,80,600C 3,010 30 90,300

150 lot FG 5,71,900

Material Price Variance: = (SR – AR) AQtyA = (1 –1.1) 3,00,500 = (30,050)B = (1.5 – 1.65) 1,19,600 = (17,940)C = (30 – 29.5) 3,100 = 1,550 46,440 (Adverse)



Material Usage Variance: = (SQ – AQ) SRA = (3,01,000 – 3,00,500) × 1 = 500B = (1,20,400 – 1,19,600) × 1.5 = 1200

C = (3,010 – 3,100) × 30 = (2,700)

_______ (1,000) Adverse.

Material Cost Variance:= SC – AC= MPV + MUV= (46,440) + (1,000) = (47,440) Adverse.

Question 11: 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’ ` 15. 3. Actual input of Chemical ‘B’ 70 kilograms. 4. Actual price per kilogram of Chemical ‘A’ ` 15. 5. Standard normal loss 10% of total input. 6. Materials cost variance total ` 650 adverse. 7. Materials yield variance total ` 135 adverse.

Required: Calculate: 1. Material mix variance total 2. Material usage variance total 3. Material price variance total 4. Actual loss of actual input 5. Actual input of Chemical ‘A’ 6. Actual price per kilogram of Chemical ‘B’


MaterialStandard Standard

Ratio for Actual Mix

ActualQty. (kg) Rate (`/kg) Amount

(`)Qty. (kg) Rate

(`/kg)Amount

(`)A 50 12 600 55 40 15 600

B 50 15 750 55 70 20 1,400 (B.f.)

100 for 90G 1,350 110 110 (W.N. 2) 2,000

Statement of Requirement1. Material Mix Variance = (55 – 40) × 12 + (55 – 70) × 15 = 15 × 12 + (–15 × 15) = – 15 × 3 = – 45 = 45 (Adverse)2. Material Usage Variance = (S.Q. – A.Q.) × S.R. = (50 – 40) × 12 + (50 – 70) × 15 = 180 (Adverse)3. Material Price Variance = (S.R. – A.R.) × A.Q. = (12 – 15) × 40 + (15 – 20) × 70 = 420 (Adverse)



4. Actual Loss = (110 – 90) = 20 kg5. Actual Input of Chemical A = 110 – 70 = 40 kg

6. Actual Price per Kg of B = ` 1,400

_____ 70 = ` 20/kg

Working Note 1M.C.V = S.C. – A.C.–650 = 1,350 – A.C.Actual Cost = 1,350 + 650 = 2,000Working Note 2Material Yield Variance = (Total Standard Quantity – Total Actual Quantity) × Standard Weighted Avg. Rate

–135 = (100 – T.A.Q.) × 1,350 _____

100

13,500 ______ 1,350 = 100 – T.A.Q.

–10 = 100 – T.A.Q.Total Actual Quantity = 100 + 10 = 110 kg

Question 12: The following data is provided.Particulars A B

Standard Price/Unit ` 12 ` 15 Actual Price/Unit ` 15 ` 20 Standard Input (kgs) 50 ?

Actual Input (kgs) ? 70 Material Price Variance ? ?Material Uses Variance ? ` 300 Adv. Material Cost Variance ? ?

Required: Calculat\e the missing data indicated by the question marks from the above table.

Material mix variance for both products together was ` 45 adverse.

Solution:Data for Material Variances

Material Standard Standard Ratio for Actual Mix

Actual

Qty. (kg) Rate Amount Qty. (kg) Rate AmountA 50 12 600 50 40 15 600B 50 (W.N. – 1) 15 750 50 70 20 1400

100 1,350 100 (70 + x) 2,000

Working Note 1Material Usage Variance = (S.Q. – A.Q.) × S.R.300 Adv. = (S.Q. – 70) × 15– 20 = S.Q. – 70S.Q. = –20 + 70 = 50Working Note 2Material Mix Variance = (S.R. for Actual Mix – A.R. for Actual Mix) × S.R. = – 45Working Note 3MPV = A (12 – 15) 70 = 210 A B (15 – 20) 70 = 350 A



Question 13: The following information is provided.Standard Wages: Grade X: 90 Labourers at ` 2 per hour Grade Y: 60 Labourers at ` 3 per hourActual Wages: Grade X: 80 Labourers at ` 2.50 per hour Grade Y: 70 Labourers at ` 2.00 per hourBudgeted 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.

Solution: Data for Labour Variances

MaterialBudgeted (4000) Standard (4100) Actual (4100 units)

Lab. Hrs Rate`/hr

Amount`

Lab. Hrs (W.N. 2)

Rate Amount (`)

Lab. Hrs Rate Amount (`)

X 90 × 1,000 = 90,000

2 1,80,000 92,250 2 1,84,500 80 × 900 = 72,000

2.50 1,80,000

Y 60 × 1,000 = 60,000

3 1,80,000 61,500 3 1,84,500 70 × 900 = 63,000

2.00 1,26,000

1,35,000 3,60,000 1,53,750 3,69,000 1,35,000 3,06,000

Statement of VarianceSl. No. Particulars Basis Amount

1. Labour rate variances (S.R. – A.R.) × Actual payment hoursGrade X → (2 – 2.50) × 72,000 = 36,000AGrade Y→ (3 – 2) × 63,000 = 63,000F 27,000 (Fav.)

2. Labour effi ciency variance (Standard hour – Actual work hr.) × Standard rateGrade X → (92,250 – 72,000) × 2 = 40,500F Grade Y → (61,500 – 63,000) × 3 = 4500F 36,000 (Fav.)

Working Note 1Calculation of Net Production

Budgeted (Units) Actual (Units)

Gross Production 5,000 5,000

(–) Loss (Normal) 1,000 (20% of 5,000)

9,00

Net Production 4,000 4,100

We should assume that Budgeted gross & actual gross production will be same.Working Note 2Calculation of Revised Budgeted Hrs.X → 4,000 F.G. → 90,000 Lab. Hr.

1 F.G. → 90,000

______ 4,000 Lab. hr.

4100 F.G. → 90,000

______ 4,000 × 4,100 Lab. hr.

= 92,250 Lab. Hr.Y → 4,000 F.G. → 60,000 Lab. Hr.

1 F.G. → 60,000

______ 4,000 Lab. Hr.



4100 F.G. → 60,000

______ 4,000 × 4,100 Lab. Hr.

= 61,500 Lab. Hr.

Question 14: 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 ` 1.25 , Re 0.80 and Re 0,70, 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 `120, Re 0.85 and Re. 0.65, respectively. Two hours were lost due to abnormal idle time and 960 units of output were produced. Calculate various labour variances.

Solution:

Question 15: 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:

Category or Workers

Standard Actual

No. of Labourers Weekly wage rate per Labourer (`)

No. of Labourers Weekly wage rate per Labourer (`)

Skilled 75 60 70 70Semi-skilled 45 40 30 50Unskilled 60 30 80 20

The work is actually completed in 32 weeks.

Required: Calculate the various labour variances.

Solution: Data for Labour Variance

Budgeted (1000) Revised Budgeted (960) Actual (960) Actual WorkingHoursLab Hr. Rate Amount

(`)Lab Hr. Rate Amount

(`)Lab Hr. Rate Amount

(`)Men 400 1 400 384 1 384 520 3 1,560 494Women 200 2 400 192 2 384 160 4 640 152Boys 200 3 600 192 3 576 120 5 600 114

1,400 1,344 2,800

Statement of Labour VarianceSl. No. Particulars Basis Amount (`)

1. Labour Cost Variance (S.C. – A.C.) 1344 – 2800 1,456 (Adv.)

2. Labour Rate Variance (S.R. – A.R.) × Actual Pay. HrsMen → (1 – 3) × 520 = 1040 Adv.Women → (2 – 4) × 160 = 320 Adv.Boys → (5 – 5) × 120 = 240 Adv.

1,600 (Adv)

3. Labour Effi ciency Variance (Standard Hrs. – Act. Wor. Hours) × S.R.Men → (384 – 494) × 1 = 110 A.Women → (192 – 152) × 2 = 80 F. Boys → (192 – 114) × 3 = 234 F.

204 (Fav.)

4. Labour Adle Hour Variance Men → 13 × 2 × 1 = 26 AWomen → 4 × 2 × 2 = 16 ABoys → 3 × 2 × 3 = 18 A

60 (Ad.)



Question 16: The following of the two departments are given below: Dept. A Dept. B

Actual gross wages ( direct) ` 2,000 ` 1,800Standard hours produced 8,000 6,000

Standard rate per hour 30 Paise 35PaiseActual Hours Worked 8,200 5,800

Required: Calculate each of the three wage variance for the two department.

Solution: Data for Labour Variance

CategoryBudget/Revised

Standard Ratio for Actual Mix (weeks)

ActualTime

(weeks)Rate

(`/week)Amount

(`)Qty. Rate Amount

(`)Skilled 2,250 60 1,35,000

2,400

⎛ ⎞×⎜ ⎟⎝ ⎠

2,250 57605,400

2,240 70 1,56,800

Semi-skilled 1,350 40 54,0001,440

⎛ ⎞×⎜ ⎟⎝ ⎠

1,350 5,7605,400

960 50 48,000

Unskilled 1,800 30 54,0001,920

⎛ ⎞×⎜ ⎟⎝ ⎠

1,800 5,7605,400

2,560 20 51,200

5,400 2,43,000 5760 5,760 2,56,000

Statement of Labour Variances

Sl. No. Particulars Basis Amount1. Labour cost variance Std. Cost – Act. Cost

2,43,000 – 2,56,000 = 13,000 (Adv.)13,000 (Adv.)

2. Labour rate variance (S.R. – A.R.) × Act. Pay. HrsSkilled → (60 – 70) × 2240 = 22400ASemi-skilled → (40 – 50) × 960 = 9600AUnskilled → (30 – 20) × 2,560 = 25600F

6,400 (Adv.)

3. Labour effi ciency variance (S.Q. – A.Q.) × S.R.Skilled → (2,250 – 2,240) × 60 = 600F.Semi-skilled → (1,350 – 960) × 40 = 15,600F.Unskilled → (1,800 – 2,560) × 30 = 22,500A

6,600 (Adv.)

4. Labour mix variance (S. Ratio for Actual Mix – Actual Ratio for Actual Mix) × S.R.Skilled → (2,400 – 2,240) × 60 = 9,600F.Semi-Skilled → (1,440 – 960) × 40 = 19,200 Fav.Unskilled → (1,920 – 2,560) × 30 = 19,200 Adv. 9,600 (Fav.)

5. Labour yield variance (Standard Ratio for Standard Quantity – Standard Ratio for Actual Quantity) × S.R.Skilled → (2,250 – 2,400) × 60 = 9000A.Semi-Skilled → (1350 – 1440) × 40 = 3600A.Unskilled → (1800 – 1920) × 30 = 3600A.

16,200 (Adv.)

Question 17: The following data is given:Particulars Budget Actual

Production (in units) 400 360Man hours to produce above 8,000 7,000Variable Overheads (in Rupees) 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.Solution:

Budget Standard ActualQ R A Q R A Q R A

Labour 8,000 1.25 10,000 7,200 1.25 9,000 7,000 1.3071 9,150Hours 400 FG 360 FG 360 FG

V.O/H. Cost Variance: = SC – AC = 9,000 – 9,150 = (150) Adv.V.O/H. Effi ciency Variance: = (SH – AH) SR = (7,200 – 7,000) 1.25 = 250 Fav.V.O/ H. Exp. Variance: = (SR – AR) AW Hr = (1.25 – 1.3071) 7,000 = (400) Adv

Question 18: 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 fi xed overheads ` 1,400

Actual output 1,200 units

Actual hours worked 32 hours

Actual fi xed overheads ` 1,500

Required: You are required to prepare a statement of variances.

Solution: Data for Variance: B Hr RR BOV Actual 40 35 1,400 1,500 AH S Hr Rec 32 34.2857 34.2857 × 35Budgeted Hrs = 40Budgeted O/P = 1,400Budgeted F O/H = 1,400Recovery rate/hr = 35Recovery rate/Unit = ` 1Actual Hrs = 32Actual O/P = 1,200Budgeted Hrs for actual O/P = 34.2857 = Std HrsActual O/H = 1,000Actual recovery = 1,200Fixed O/H – Vol. Variance = (Recov. O/H – Budgeted O/H) = 1,200 – 1,400 = (200) AdvFixed O/H Exp Variance = = (Budgeted O/H – Actual O/H) = 1,100 – 1,000 = (100) Adv.



F O/H Effi ciency Variance = (S Hr – Actual Hr) RR = (34.2857 – 32) 35 = 80 Fav.F O\H Capacity Variance = (Act Working Hr – Budgeted Hr)RR = (32 – 40)35 = (280) Adv.

Question 19: AB Company limited is having Standard Costing system in operation for quite some time. The following data relating to the month of April, 1994 is available from the cost records:

Budgeted ActualOutput (in units) 30,000 32,500Operating hours 60,000 60,000Fixed overheads 45,000 50,000Variable overhead (`) 60,000 68,000Working days 25 26

Required: To work out the relevant variances.

Solution: Basic Calculations:

Standard time per unit = Budgeted Hours

______________ Budgeted Units

= 30,000

______ 30,000 = 1 hour

Total Standard Overhead Rate per hour:

= Budgeted Overheads

_________________ Budgeted Hours

= 1,05,000

________ 30,000 = ` 3.50 per hour

Standard Fixed Overhead Rate per hour

= Budgeted Fixed Overheads

______________________ Budgeted Hours

= 60,000

______ 30,000 = ` 2

OCV = Recovered Overheads – Actual OverheadsRecovered Overheads = Standard Hours for Actual Output × Standard Rate = 32,500 × ` 3.50 = 1,13,750

OCV = 1,13,750 – 1,18,000 = ` 4,250 (Adverse)Total Overhead Cost Variance may be segregated into (i) Variable Overhead Cost Variance and (ii) Fixed Overhead Cost Variance.Variable Overhead Cost Variance = Recovered V. Overheads – Actual V. Overheads = 32,500 hrs. × ` 2 – ` 68,000 = ` 3,000 (Adverse) Fixed Overhead Cost Variance = Recovered Overheads × Actual Overheads = 32,500 hrs. × ` 1.50 – ` 50,000 = ` 48,750 – ` 50,000 = ` 1,250 (Adverse) The Fixed Overhead cost variance can be segregated into (i) Expenditure Variance and (ii) Volume Variance.



Expenditure Variance = Budgeted Overheads – Std. Overheads = ` 45,000 – ` 50,000 = ` 5,000 (A) = Recovered Overheads – Budgeted Overheads = 32,500 hrs. × ` 1.50 – ` 45,000 = ` 48,750 – ` 45,000 = ` 3,750 (Favourable) Fixed Overhead Volume Variance can be segregated into Effi ciency Variance and Capacity Variance. Effi ciency Variance = Recovered Overheads – Std. Overheads Or Standard Rate × (Standard Hours for Actual Output – Actual Hours) = 1.5 × (32,500 – 33,000) = ` 750 (Adverse)Capacity Variance = Standard Rate × (Actual Hours – Budgeted Hours) = 1.50 × (33,000 – 30,000) = ` 4,500 (Favourable)Capacity Variance may further be divided into (i) Calendar Variance and (ii) Revised Capacity Variance.Calendar Variance = Extra /Defi cit hours worked were 25 while actual days worked. The total number of extra hours worked therefore, will be 1,200, i.e. 30,000/2,500 = 1, 200 × ` 1.5 = ` 1,800 (Favourable) Revised Capacity Variance is the Capacity Variance left after segregating Calendar Variance. In other words, Revised Capacity Variance can be calculated as follows: Revised Capacity Variance = Capacity Variance – Calendar Variance = ` 4,500 (F) – ` 1,800 (F) = ` 2,700 (F) Alternatively , Calendar Variance may also be calculated as follows: Calendar Variance = Possible Overheads – Budgeted Overheads = 31,200 hrs. × ` 1.50 – 45,000 = ` 46,800 – 45,000 = 1,800 (Favourable) Revised Capacity Variance = Standard Overheads – Possible Overheads = ` 1.5 × 33,000 – ` 1.5 × 31,200 = ` 49,500 – ` 46,800 = ` 2,700(F) Verifi cation:

OCV = FOCV + VOCV = ` 1,250 (A) + ` 3,000 (A) = ` 4,250 (A) FOCV = FOEXPV + FOVV = ` 5,000 (A) + ` 3,750 (F) = ` 1,250 (A)FOVV = ` FOCAPV + FOEFFV = ` 4,500 (F) + ` 750 (A) ` 3,750(F) = Calendar Variance + Revised Capacity Variance FOCAPV = ` 1,800 (F) + ` 2,000 (F) = ` 4,500 (F)

Question 20: Consider the following data.

Particulars Budget ActualHrs. 20,000 20,100Output (units) 5,000 5,200Fixed Overhead(`) 10,000 10,200

Required: Calculate the fi xed overhead variables.



Data for Fixed – OH Variances

Budgeted Output Recovery Rate Budget fi xed OH5,000 2 10,000

Actual Recovered Actual Expenditure5,200 10,400 10,200

Statement of Fixed – OH VariancesSl. No. Particulars Basis Amount

1. Fixed – OH cost variances Recovered – Actual 200 Fav.

2. Fixed – OH volume variances Budget – Recovered 400 Fav.

3. Fixed – OH Expenditure variances Budget – Actual 200 Adv.

Question 21:

Budgeted no. of working days 24Budgeted no. of hours per month 12,000Fixed overhead rate Re. 0.50 per hourActual no. of working days in June 25

Compute the calendar varianceSolution: Calendar Variance = (Actual days – Budgeted days) × Recovery Rate Per day = (25 – 24) × 250 (W.N. 1) = 1 × 250 = ` 250 Favourable.Working Note 1Calculation of Recovery RateBudget no. of hours per month = 12,000 hrs.fi xed – OH rate = 0.50/ hr.Budget fi xed – OH (In a month) = ` 6,000

Recovery Rate per day = Total fi xed Budget OH

__________________________ No. of working days in a month = 6,000

_____ 24 = ` 250/day

Question 22: You are given the following data:Budgeted Actual

Fixed overhead for July ` 10,000 10,500Units of production in July 5,000 4,500Standard time for one unit 4 hoursActual hours worked 20,100 hours

Calculate all variances relating to fi xed overheads.

Solution Data for Fixed Overhead (OH) Variances

Budgeted Hour for Budgeted Output Recovery Rate Budgeted Fixed Overhead5,000 × 4 = 20,000 ` 0.50/hr 10,000

Budget Hour for Actual Output Recovered Actual Expenditure

× =20,000 4,500 18,0005,000

9,000 10,500



Statement of Fixed – OH Variances

Sl. No. Particulars Basis Amount1. Fixed – OH volume variances Recovered – Budget

9,000 – 10,000 1,000 (Adv.)

2. Fixed – OH expenditure variances Budget – Actual10,000 – 10,500 500 (Adv.)

3. Fixed – OH cost variances Recovered – Actual9,000 – 10,500 1,500 (Adv.)

Question 23: Fixed overhead as per budget, i.e. estimated ` 5,000Budgeted hours, i.e. estimated 10,000Actual hours worked 7,000Actual fi xed overhead 5,600

Required: Compute the expenditure and volume variances.

Solution:Data for Fixed Overhead Variances

Budgeted Hours Recovery Rate Budget fi xed Overhead10,000 ` 0.50/hr. ` 5,000

Actual Hours Recovered Actual fi xed overhead7,000 3,500 ` 5,600

Statement of Fixed Overhead VariancesSl. No. Particulars Basis Amount

1. Fixed overhead Expenditure variance Budget – Actual` 5,000 – ` 5,600 600 (Adv.)

2. Fixed overhead volume variance Recovered – Budget` 3,500 – ` 5,000 1500 (Adv.)

3. Fixed overhead total variance Recovered – Actual ` 3,500 – ` 5,600 2100 (Adv.)

Question 24:

Budgeted Output Product Budgeted Hour Actual Hour Actual OutputA 10 8 A

B 2 —

C 8 20 C

D 50 40 D

E 10 —

F 8 15 F

G 12 15 G

100

Budgeted overhead = `10,000Actual overhead = ` 12,500.

Required: Calculate the fi xed overhead volume and Exp variance.



Solution:Data for fi xed – OH variances

Budgeted Hour for Budgeted output Recovery Rate Budget fi xed Overhead100 (7) 100 10,000

Budgeted hour for Actual Output Recovered Actual88 (10 + 8 + 50 + 8 + 12) 8,800 12,500

Statement of fi xed overhead variances

Sl. No. Particulars Basis Amount

1. Fixed overhead expenditure variances Budget – Actual10,000 – 12,500 2,500 (Adv.)

2. Fixed overhead volume variances Recover – Budget8,800 – 10,000 1,200 (Adv.)

Note: If a company produces different products and every product does not consume equal budgeted hours, it is better to apportion high part of fi xed 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.

Question 25: A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fi xed 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 fi xed overheads were ` 1,42,000.

Required: To compute — 1. Effi ciency variance 2. Revised capacity variances 3. Calendar variance 4. Expense variance 5. Volume variance 6. Total fi xed overheads variance

Data for Fixed Overhead Variances

Budgeted Hours for Budgeted Output

Recovery Rate Budget Fixed Overhead (`) Actual Working Hrs. (`)

24,000 Hr. (6,000 Unit) ` 6 / hr. 1,44,000 21,840 Hrs.

Budgeted hour for Actual Output(S. Hr)

Recovered(`)

Actual(`)

21,220 (4 × 5,305) 1,27,320 (21,220 × 6) 1,42,000


1. Effi ciency variance (S. Hr – A.W.Hr) × R.R= (21.220 – 21,840) × 6 3,720 (Adv.)

2. Revised Capacity variance Total Cap. variance – Calendar Variance12,960 – 5,760 (W.N. – 1) 18,720 (Adv.)



3. Calendar variance (Actual days – Bud. days)= (26 – 25) × 5,760= 5,760 5,760 (Fav.)

4. Expenses variance Budgeted – Actual1,44,000 – 1,42,000 2,000 Fav.

5. Volume variance Recovered – Budgeted1,27,320 – 1,44,000 16,680 (Adv.)

6. Total fi xed overhead variance Recovered – Actual1,27,320 – 1,42,000 14,680 (Adv.)

Working Note 1Calculation of Total Capacity VarianceTotal Capacity Variance = (Actual Working Hr – Budgeted Hour) × R.R. = (21,840 – 24,000) × 6 = 12,960 Adverse

Question 26: The following fi gures are extracted from the books of a company:Particulars Budget Actual

Output ( in units) 6,000 6,500

Hours 3,000 3,300

Overhead

Cost-fi xed 1,200 1,250

Variable 6,000 6,650

Number of days 25 27

Required: Compute and analyse the overhead variances.

Note: Assume “8” Working Hour Per day, Budgeted Hours = 20 × 8, Actual Hour = 21 × 8.

Solution: Data for Fixed Overhead Variances

Budgeted Hours for Budgeted output

Recovery Rate Budgeted Fixed Overhead (`)

Actual working Hours for Actual output

3,000 Hrs ` 0.4 / hr. 1,200 3,300

Standard Hours. Recovered Fixed OH (`) Actual Fixed Overhead (`)3,250 3,250 × 0.40 = 1,300 1,250

Statement of Variances

Sl. No. Particulars Basis Amount (`)

1. Fixed OH Volume Variances Recover – Budget1,300 – 1,200 100 Fav.

2. Fixed OH Expenditure Variances Budget – Actual1,200 – 1,250 50 Adv.

3. Fixed OH Cost Variance Recover – Actual1,300 – 1,250 50 Fav.

4. Fixed OH Effi ciency Variance (S. Hr. – A.W.Hr) × R.R.= (3,250 – 3,300) × 0.40 20 Adv.

5 Fixed OH Capacity Variance (A.W.Hr – Bud. Hr) × R.R.= (3,300 – 3,000) × 0.40 120 Fav.

6. Fixed OH Calendar Variance (Actual Work Days – Budgeted days) × R.R./day

1,20025

= (27 – 24) ×

96 Fav.



7. Fixed OH Balanced Capacity Variance Total Capacity Variance – Calendar Variance= 120 Fav. – 96 Fav. 24 Fav.

8. Variable OH Variable Standard variable OH for Actual Output – Actual variable OH Actual Output

= ×6,000 6,500 - 6,6506,000

= 6,500 – 6,650 150 Adv.

Question 27: 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 20 21Fixed overhead 40,000 39,000Variable overhead 12,000 12,000

Required: Calculate the following overhead variances: (a) Variance overhead variance (b) Fixed overhead variance. (i) Expenditure Variance (b) Volume Variance (c) Effi ciency Variance (iv) Calendar variance.

Solution:Data for Overhead Variances

Budgeted Hours(4,000 Units)

Recovery Rate Budgeted fi xed OH Actual working Hrs.

20 × 8 Hrs = 160 Hrs ` 250/hr. ` 40,000 21 × 8 Hrs = 168 Hrs

Budgeted Hours for actual output Recovered Actual

⎛ ⎞×⎜ ⎟⎝ ⎠

160 3,8004,000 152 Hours.

` 38,000 ` 39,000



1. Variable OH Variances Standard Variable OH for actual output – Actual variable OH for actual output⎛ ⎞× −⎜ ⎟⎝ ⎠

12,000 3,800 12,0004,000 = 11,400 – 12,000

600 (Adv.)

2. Fixed OH Variance Recovered – Actual38,000 – 39,000 = 1,000 1,000 (Adv.)

3. Fixed OH Expenditure Variance Budget – Actual40,000 – 39,000 1,000 (Fav.)

4. Fixed OH Volume Variance Recovered – Budged 38,000 – 40,000 2,000 (Adv.)

5. Fixed OH Effi ciency Variance (Standard Working Hr – Actual Working Hour) × R.R./hr.(152 – 168) × ` 250/hr. 4,000 (Adv.)

6. Fixed OH Calendar Variance (Actual Working days – Budgeted Working days) × R.R. per day

(21 – 20) × 40,000

20

2,000 Fav.



Question 28: A Cost Accountant of a company was given the following information regarding the overheads for February 1987: 1. Overheads cost variance ` 1,400 adverse. 2. Overheads volume variance 1,000 adverse. 3. Budgeted hours for February 1987 1,200 hours. 4. Budgeted overheads for February 1987 ` 6,000. 5. Actual rate of recovery of overheads ` 8 per hour.

Required: To assist the cost accountant in computing the following for February 1986— 1. Overheads expenditure variance 2. Actual overheads incurred 3. Actual hours for actual production 4. Overheads capacity variance 5. Overheads effi ciency variance 6. Standard hours for actual production.

Solution: Statement of Required Information

Sl. No. Particulars Basis Amount (`)1. Overhead Expenditure Variance W.N. 1 400 A.2. Actual Overhead incurred W.N. 2 6,400 3. Actual Hours for Actual production Actual - OH

Actual Rate

800 hrs.

4. Overheads Capacity Variance (Act. Work. Hr. – Bud. Hr) × R.R.

(800 – 1,200) × 6,0001,200

2,000 Adv.

5. Overheads Effi ciency Variance (Standard Hr. – Act. Wor. Hr.) × R.R.(1,000 – 800) × 5 1,000 Fav.

6. Standard hours for actual production W.N. – 3 1,000 hrs.

Working Note 1Calculation of Expenditure VarianceOverhead Variance = Expenditure Variance + Volume Variance

– 1,400 = Expenditure Variance – 1,000∴ Expenditure Variance = – 1,400 + 1,000 = 400 Adverse Working Note 2Calculation of Actual OverheadOverhead Expenditure Variance = Budgeted – Actual

– 400 = 6,000 – Actual∴ Actual – OH Expenditure = 6,000 + 400 = ` 6,400Working Note 3Calculation of Standard Hour for Actual ProductionOverhead volume variance = Recovered – Budgeted

– 1,000 = Recovered – 6,000∴ Recovered = ` 5,000Again overhead



Recovered = Standard hour × Recover Rate5,000 = Standard Hour × ` 5

∴ Standard Hour = 1,000 hr.

Question 29: 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 60 kg @ ` 4.50/ kg ` 270Direct labour 36 hr @ ` 8.25/ hour ` 297

Variable overhead 36 hr @ ` 4.75/ hour ` 171` 738

Standard output per month 24,000 units

Production for April 2005 amounted to 210 batches. The relevant statistics followsRaw material used 13,000 kg

Cost of Raw material used ` 61,100

Direct labour cost ` 66,924

Variable Overhead ` 36,000

Actual hours worked 7,920

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.

Solution: Data for Resource Variance

ParticularsBudgeted (1 FG) Standard (21,000) Actual (21,000)




Mat (kg) 0.6 4.50 2.7 12,600 4.50 56,700 13,000 4.70 61,100Labour (hrs.) 0.36 8.25 2.97 7,560 8.25 62,370 7,920 8.45 66,924V OH (hours) 0.36 4.75 1.71 7,560 4.75 35,910 7,920 4.545 36,000



1. Material Price Variance (4.50 – 4.70) × 13,000(S.R. – A.R.) × A.Q.

2,600 (Adv.)

2. Material Usage Variance (S.Q. – A.Q.) × S.R.(1,26,000 – 13,000) × 4.50 1,800 (Adv.)

3. Material Cost Variance S.C. – A.C.56,700 – 61,100 4,400 (Adv.)

4. Labour Rate Variance (S.R. – A.R.) × Act Wor. Hrs.(8.25 – 8.45) × 7920 1,584 (Adv.)

5. Labour Effi ciency Variance (Standard Hrs. – A.W.Hr) ×. S.R.(7,560 – 7,920) × 8.25 2,970 (Adv.)

6. Labour Cost Variance S.C. – A.C.62,370 – 66,924 4,554 (Adv.)

7. Variable OH Expenditure Variance (S.R. – A.R.) × Act W. Hrs.(4.75 – 4.545) × 7,920 1,626 Fav.

8. Variable OH Effi ciency Variance (Stan. Hrs. – A.W. Hrs.) × S.R.(7,560 – 7,920) × 4.545 1,636 Adv.

9. Variable OH Cost Variance S.C. – A.C.35,910 – 36,000 10 Adv.



Question 30: A Ltd., operates a system of standard costs. Following information is available:Actual: `

Materials Consumed 1,89,000(3,600 units at ` 52.50 per unit)Direct Wages 22,100Fixed Expenses 1,88,000Variable Expenses 62,000Output during the period was 3,500 units of fi nished 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 `

Materials (one unit @ 50 per unit) 50

Direct wages 6

Fixed expenses 40

Variable expenses 20

Total standard cost per unit 116

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 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: (a) Direct Material Cost Variance (b) Material Price Variance (c) Material Usage Variance (d) Direct Labour Cost Variance (e) Wage Rate Variance (f) Labour Effi ciency Variance (g) Idle Time Variance (h) Variable Expenses Variance (i) Fixed Expenses Expenditure Variance (j) Fixed Expenses Volume Variance (k) Fixed Expenses Capacity Variance (l) Fixed Expenses Effi ciency Variance (m) Total Cost Variance.

Solution:

ParticularsBudgeted (1 Unit) Standard (3,500) Actual (3,500)

Qty. Rate Amount (`) Qty. Rate Amount (`) Qty. Rate Amount (`)Mat (unit) 1 50 50 3,500 50 1,75,000 3,600 52.50 1,89,000

Labour (hrs.) 2 3 6 7,000 3 21,000 6,800 3.25 22,100

V OH (hrs.) 2 10 20 7,000 10 70,000 6,400 9.6875 62,000

Data for Overhead Variances

Budgeted Hrs Recovery Rate Budgeted Fixed OH Actual Working Hrs.

9,600 ` 20 / hrs. 1,92,000 6,400

Budgeted Hrs for actual output Recovered Actual 7,000 ` 1,40,000 1,88,000


Sl. No. Particulars Basis Amount(a) Material Cost Variance S.C. – A.C.

1,75,000 – 1,89,000 14,000 A.



(b) Material Price Variance (S.R. – A.R.) × A.Q.(50 – 52.50) × 3,600 9,000 A.

(c) Material Usage Variance (S.Q. – A.Q.) × S.R(3,500 – 3,600) × 50 5,000 A.

(d) Labour Cost Volume S.C. – A.C.21,000 – 22,100 1,100 A.

(e) Wage Rate Variance (S.R. – A.R.) × A.P. Hrs(3 – 3.25) × 6,800 1,700 A.

(f) Labour Effi ciency Variance (S. Hr. – A.W.Hr) × S.R.(7,000 – 6,400) × 3 1,800 Fav.

(g) Idle Time Variance Idle Hr x. S.R.400 × 3 1,200 Adv.

(h) Variable Expenses Variances S.C. – A.C.70,000 – 62,000 8,000 F.

(i) Fix. OH Expenditure Variance Budget – Actual1,92,000 – 1,88,000 4,000 F.

(j) Fix OH Volume Variances Recovered – Budget 1,40,000 – 1,92,000 52,000 Adv.

(k) Fixed Expenses (OH) Capacity Variance (A.W.Hr – Bud. Hr) × R.R.(6,400 – 9,600) × 20 64,000 Adv.

(l) Fixed Expenses (OH) Effi ciency Variance (S.Hr. – A.W.Hr) × R.R.(7,000 – 6,400) × 20 12,000 Fav.

(m) Total cost variance

Question 31: 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 m @ ` 6 per m 12.00 Direct labour: 1 hour @ ` 4.40 per hour 4.40 Variable overhead: 1 hour @ ` 3 per hour 3.00 19.40During July, 1993, 6000 units of M were produced and the related data are as under:Direct material acquired – 19000 m @ ` 5.70 per m. Material consumed – 12670 m. `

Direct labour - ? Hours@ ` ? per hour 27,950 Variable overheads incurred 20,475The variable overheads effi ciency 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 fi gures and work out all the relevant variance.

Solution:

Budgeted (1 FG) Standard (6,000) ActualQty. Rate Amount

(`)Qty. Rate Amount

(`)Qty. Rate Amount

(`)Mat (Meter) 2 6 12 12,000 6 72,000 12,670 5.70 72,215

Labour (hrs.) 1 4.40 4.40 6,000 4.40 26,400 6,500 (W.N. 1) 4.3 27,950

V OH (hrs.) 1 3 3 6,000 3 18,000 6,500 (W.N. 1) 3.15 20,475





1. Material price variance (S.R. – A.R.) × A.Q.(6 – 5.70) × 12,670 3,801 F.

2. Labour Rate Variance (S.R. – A.R.) × A.Pay.Hr(4.40 – 4.30) × 6,500 650 F.

3. Variable – OH Expenditure Variance (S.R. – A.R.) × A.W.Hr(3 – 3.15) × 6,500 975 A.

4. Material Usage Variance (S.Q. – A.Q.) × S.R.(12,000 – 12,670) × 6 4,020 A.

5. Labour Effi ciency Variance (S. Hr – A.W.Hr) × S.R.(6,000 – 6,500) × 4.40 2,200 A.

6. VOH Effi ciency Variance (S. Hr – A.W.Hr) × S.R.(6,000 – 6,500) × 3 1,500 A.

7. Material Cost Variance S.C. – A.C.72,000 – 72,215 215 A.

8. Labour Cost Variance S.C. – A.C.26,400 – 27,950 1,550 A.

9. Variable OH Cost Variance S.C. – A.C.18,000 – 20,475 2,475 A.

Working Note 1Calculation of Actual Working HoursVariable OH Effi ciency variable = (S. Hr. – A.W.Hr) × S.R.– 1,500 = (6,000 – A.W.Hr) × 3– 500 = 6,000 – A.W.Hr

Actual working hour = 6,000 + 500 = 6,500 Hr.

Question 32: Mr M provide the following information relating to 1,000 units of product ‘ZED’ during the month of April, 1993:Standard price per kg of raw-material ` 3Actual total direct material cost ` 10,000Standard direct labour hours 1,600Actual direct labour hours 1 ,800Total standard direct labour cost ` 8,000Standard variable overhead per direct labour hour ` 1Standard variable overhead per unit of ZED ` 1.60Total standard variable overhead ` 1,600Actual total variable overheads ` 1,620The material usage variance is ` 600 adverse and the overall cost variance per unit of ZED is Re. 0.07 adverse as compared to the total standard cost per unit of ZED of ` 21.

Required: Compute the following– A. Standard quantity of raw material per unit of ZED. B. Standard direct labour rate per hour. C. Standard direct material cost per unit of ZED. D. Standard direct labour cost per unit of ZED. E. Standard total material cost for the output. F. Actual total direct labour cost for the output.



G. Material price variance. H. Labour rate variance. I. Labour effi ciency variance. J. Variable overhead expenditure variance. K. Variable overheads effi ciency variance.

Note: Key calculation should form part of the answer. = 6,500 Hr.

Solution: Statement of Missing Variances


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) 11.40

D Standard Direct labour Cost/Unit of 2 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.) × A.Q(3 – 2.5) × 4,000 2,000 F.

H Labour Rate Variance (S.R. – A.R.) × A. Day. Hr.(5 – 5.25) × 1,800

450 A.

I Labour Effi ciency Variance (S. Hr – A.W.Hr) × S.R.(1,600 – 1,800) × 5 1,000 A.

J Variable OH Expenditure Variance (S.R. – A.R.) × A.W.Hr(1 – 0.90) × 1,800 180 F.

K Variable OH Effi ciency Variance (S. Hr – A.W.Hr) × S.R.(1,600 – 1,800) × 1 200 A

Working Note 1

Data for Resource Variance

Standard/Budget (1,000 FG) Actual (1,000 FG)Qty. Rate Amount Cost per Unit Qty. Rate Amount Cost per unit

Material 3,800 3 11,400 11.4 (B.f.) 4,000 (W.N. 2) 2.5 10,000 10Labour Hr. 1,600 5 8,000 8 1,800 5.25 9,450 9.45 (B.f)

V – OH Hr. 1,600 1 1,600 1.6 1,800 0.90 1,620 1.62

21 21.07 (W.N. 3)

Working Note 2Material Usage Variance = (S.Q. – A.Q.) × S.R.– 600 = (3,800 – A.Q.) × 3– 200 = 3,800 – A.Q.∴ A.Q. = 3,800 + 200 = 4,000 kgWorking Note 3Over all cost variance = S.C. – A.C.0.07 = 21 – A.C.∴ Actual cost = 21 + 0.07 = ` 21.07



Question 33: K Limited uses standard costs and fl exible budgets for control purposes. The following information is given:1. Standard and budgeted dataThe standard material allowed per unit is 4 kg at a standard price of Re. 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 ` 96,000.2. Details for four-week period ended 29th April 1988 were:

Incurred: `

Direct wages 1,63,800

Variances:Direct wages rate, Re 0.20 per hour adverse.Direct Materials price (Calculated on purchases at time of receipt at Re. 0.05 per kilogram) ` 9,000 favourable.Direct material usage ` 1,500 adverse.Variable production overhead ` 2,200 favourable. Variable production overhead effi ciency ` 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.

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.

Data for Variance

Budgeted Standard ActualQty. Rate Amount Qty. Rate Amount Qty. Rate Amount

M 4 0.75 3 1,78,000 0.75 1,33,500 1,80,050 0.7 1,26,000L 1.9 1.9 78,000 2.1 1,63,800V O/H 1.2 1.2 78,000

Statement of Required Information

Sl. No. Particulars Basis Amount1. Number of kilogram of direct material purchases (W.N. 1) 1,80,000 kg2. The number of kilograms of direct material used above the standard allowed (W.N. 3) 2,000 kg3. The variable production overhead expenditure variance (W.N. 4) 4,600 Fav.4. The Actual Hours Worked (W.N. 1) 7,800 Hrs.5. The number of standard hours allowed for the production achieved (W.N. 5) 76,000 Hrs.

Direct Wages Paid = 1,63,800

LRV = (SR – AR) A Hr = (0.2) Adverse/ Hr.

Bud. Rate = 1.9

⇒ Actual Paid = 2.1

Actual Wages = 1,63,800 = 78,000

Hour 2.1

MPV = (SR – AR) AQ



= (0.75 – 0.7) AQ = 9,000

⇒ AQ = 1,80,000

MUV = (SQ – AQ) SR = (1,500) Adverse.

⇒ – 1500 = (SQ – 1,80,000) 0.75

⇒ SP = 1,78,000.

V O/H Exp. Variance = V O/H Cost – Effi ciency

= 220 – (2,400) = 4,600 Favorable.

Working Note 1

Calculation of Actual HoursBudgeted lab. Rate per hour =

Budgeted labour costBudgeted Hour

=

1,52,000 = Rs. 1.9080,000

Rate Variance = 0.20 AdverseActual Rate = ` (1.90 + 0.20) = ` 2.10Actual Wages = ` 1,63,800

Actual Hours = Wages 1,63,800= Rate 2.10

= 7,800 Hrs

Working Note 2

Calculation of Actual Quantity Purchased

M.P.V. → 9,000 Favourable

(S.R. – A.R.) × Actual Quantity purchased = 9,0000.05 × A. Quantity purchased = 9,000

Actual quantity purchased = =9,000 1,80,000Kg0.05

Working Note 3Material Usage Variance = 1,500 A.(S.Q. – A.Q.) × S.R. = – 1,500Excess quantity consumed × S.R. = – 1,500

Excess quantity consumed =

- 1,5000.75

= 2,000 Kg

Working Note 4

Calculation of Variable OH Expenditure VarianceVariable cost variance = V. OH Exp. variance + V. OH. Effi ciency Variance2200 = Expen. variance + (–2,400)∴ V. OH. Expenditure Variance = 4,600 Fav.

Working Note 5Calculation of Standard Hours



V. OH Effi ciency variance = (S. Hr – A.W.Hr) × S.R.–2,400 = (S.Hr – 78,000) × 1.2

S. Hr =

+-2,400 78,000

1.2 = 76,000

Question 34: 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:

`

Direct Material (3 kg at ` 5 per kg) 15.00Direct Labour (0.5 hour at ` 20 per hour) 10.00

Manufacturing Overhead (75% of direct labour cost) 7.50Total Cost 32.50

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 Effi ciency 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 1998. There was no opening stock of raw materials on 1st April, 1998.

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 (May 98)

Question 35: A Ltd. has a manufacturing division which makes a product to which the following details relate:Particulars Per unit

Materials 5 kgs at ` 2 ` 10Direct labour 12 hours at ` 2 ` 24

Variable overheads 12 hours at ` 1 ` 12

Relevant fi xed 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:



Particulars `

Direct material used (8,500 kg) 17,200Direct wages (20,000 hours) 42,000Variable Overhead 22,000Fixed overhead 9,800

91,000Net profi t 4,000Sales 95,000

Required: (a) Calculate the variance, which occurred during the month. (b) Calculate the total bonus payments to employees in the division.

Solution:(a) Calculation of Different Variances

Sl. No. Particulars Basis Amount (`)1. Material Price Variance (S.R. – A.R.) × A.Q.

(2 – 2.0235) × 8,500 200 Adv.2. Material Usage Variance (S.Q. – A.Q.) × S.R.

(9,000 – 8,500) ×2 1,000 F.3. Material Cost Variance S.C. – A.C.

(18,000 – 17,200) 800 F.4. Labour Rate Variance (S.R. – A.R.) × A.P.Hr

(2 – 2.1) × 20,000 2,000 A.5. Labour Effi ciency Variance (S.Hr – A.W.Hr) × S.R.

(21,600 – 20,000) × 2 3,200 F.6. Labour Cost Variance S.C. – A.C.

43,200 – 42,000 1,200 F.7. V – OH Expenditure variance (S.R. – A.R.) × A.W.Hr

(1 – 1.1) × 20,000 2,000 A.8. Variable – OH Effi ciency variance (S.W.Hr – A.W.Hr) S.R.

(21,600 – 20,000) × 1 1,600 F.9. Variable overhead cost variance S.C. – A.C.

(21,600 – 22,000) 400 A.10. Fixed overhead expenditure variance Budget – Actual

(10,000 – 9,800) 200 F.11. Fixed overhead volume variance Recovered – Budget

(9,000 – 10,000) 1,000 A.12. Fixed overhead cost variance Recovered – Actual

(9,000 – 9,800) 800 A.

(b) Statement of BonusParticulars Amount (`)

(i) 15% of S.C. of Material saved(S.Q. – A.Q) × S.C. × 15%(9,000 – 8,500) × 2 × 15% 150

(ii) 50% of S.C. of lab. Hrs. saved50% × 2 × (21,600 – 2,000)

1,600

Total Bonus payable 1,750



Working NoteData for Resource Variances

Budgeted Output Recovery Rate Budgeted fi xed-overhead (`)

Actual Hrs.

2,000 unitsor

24,000 hrs.

` 5 / unitor

` 0.4167 / hr.

10,000 20,000

Standard hrs./units Recovered (`) Actual (`)21,600 Hrs

or1,800 units

9,000(21,600 0.4167)

9,800

Question 36: A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires 12 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 Effi ciency ratio and establish their relationship.

Solution: Statement Showing Different Ratios

1. Effi ciency Ratio = Standard Hours

Actual Working Hours = 19,20017,600

= 1.0909

2. Capacity Ratio = Actual Working Hours

Budgeted Hours = 17,60015,500 = 1.135

3. Volume Ratio = Standard HoursBudgeted Hours =

19,20015,500 = 1.238

RelationshipVolume Ratio = Effi ciency Ratio × Capacity Ratio

= S.Hr

A.W.Hr×

A.W.HrBud.Hr = S.Hr

Bud.Hr = 1.238

Hence, all ratios provide more than one results. This indicates the favourable position in respect of effi ciency as well as capacity.Working Note 1Calculation of Budget Hours per month, Actual working Hours and standard hours.

Budgeted labour Hours = 1,86,000

12 = 15,500 Hours

Actual Working Hours = No. of days × Hrs Working per days × No. of workers = 22 days × 8 Hr./day × 100 = 17,600 hours.Standard Hours = Standard hours for X + Standard Hours for Y = 12,000 × 8 + 8,000 × 12 = 19,200 hours.

Question 37: The following is the information provided by Tulsian Ltd.

Product BudgetedSales

QuantityUnits

BudgetedSelling

Price per unit

StandardCost

Per unit`

ActualSales

QuantityUnits

ActualSelling

Price per unit`

ActualCost

Per unit`

A 60 20 15 44 25 16

B 40 10 4 66 5 5



Required: 1. Calculate all the sales variances (a) on sales value basis (b) on sales margin value basis 2. Reconcile the standard profi t with actual profi t.

Solution: Data for Sales Variance

Product Budgeted Sale Standard Ratio for actual mix

Actual SaleQty. Rate Amount (`) Qty. Rate Amount (`)

A 60 20 1,200 66 44 25 1,100

B 40 10 400 44 66 5 330

1,600 110 1,430

Statement of Sales Variances

Sl. No. Particulars Basis Amount (`)1. Sales Value Variance B.S. – A.S.

(1,600 – 1,430) 170 A.2. Sales Price Variance (B.S.P.–A.S.P.) × A.Q.

A → (20 – 25) × 44 = 220 FB → (10 – 5) × 66 = 330 A 110 F.

3. Sales Volume Variance (B.Q. – A.Q) × B.S.P.A → (60 – 44) × 20 = 320 AB → (40 – 66) × 10 = 260 F 60 A.

4. Sales Mix Variance (S.R. for Actual Mix – Actual Ratio for Act Mix) × B.S.P.A → (66 – 44) × 20 = 440 AB → (44 – 66) × 10 = 220 F

220 A

5. Sales Yield Variance (S.R. for Bud. Mix – Standard Ratio for T.A. Mix.) × B.S.P.A → (60 – 66) × 210 = 120 FB → (40 – 44) × 10 = 40 F 160 F

Reconciliation Statement Budgeted profi t → 540Adjust Sales Variance:Sales price variance → 110 A.Sales Volume Variance → 60 A.Adjust cost variances:(1060 – 1034) → 26 FActual profi t → 396Working Note 1

Statement of Profi t

Budget ActualSales Value → 1,600A → 60 × 20 = 1,200B → 40 × 10 = 400

Sales Value → 1,430A → 44 × 25 = 1,100B → 66 × 5 = 330

Less : Cost (1,060)A → 60 × 15 = 900B → 40 × 4 = 160Profi t → 540

Less: Cost (1,034)A → 44 × 16 = 704B → 66 × 5 = 330Profi t → 396

Subject to Checking



Question 38: The following in the information given:

Product A Product BBudgeted Sales Quantity (units) ? 400Actual Sales Quantity 500 ?

Budgeted Selling Price per unit ` 12 ` 15

Actual selling Price per unit ` 15 `20

Sales Price Variance ? ?

Sales Volume Variance 1200(F) ?Sales Value Variance ? ?

Required: Compute the missing fi gure indicated by the question from the above table.

Sales Mix Variance for Both the Products Together was ` 450 (F)“F” Denotes Favorable.

Solution: Statement showing required missing fi gures

Sl. No. Particulars Basis Figures1. Budgeted Sales quantity of A W.N. – 1 400 Units

2. Actual Sales quantity of B W.N. – 1 800 Units3. Sales price variance (B.P. – A.P.) × Act. Quantity

A → (12 – 15) × 500 = 1,500 FB → (15 – 20) × 800 = 4,000 F ` 5,500 F.

4. Sales Volume Variance of B (B.Q. – A.Q.) × B.S.P.(400 – 800) × 15 ` 6,000 F.

5. Sales Value Variance B.S.P. – A.S.P.A → 4,800 – 7,500B → 6,000 – 16,000

` 2,700 F.` 10,000 F.

Working Note 1Data for Sales Variances

Budgeted Standard Ratio

ActualQty. Rate Amount (`) Qty. Rate Amount (`)

A 400 (W.N. – 2) 12 4,800 650 500 15 7,500B 400 15 6,000 650 800 20 16,000

10,800 1300 1,300(W.N. 3) 23,500

Working Note 2

Calculation of Budgeted Quantity of A

Sales Volume Variance = (B.Q. – A.Q.) × S.R.– 1,200 = (B.Q. – 500) × 12– 100 = B.Q. – 500B.Q. = – 100 + 500 = 400

Working Note 3INCOMPLETE

Act × be total Actual mix of product A and B.



Sales Mix Variance = 450 F.(S.R. for Actual Mix – Actual Ratio Actual Mix) × B.S.P. = – 450 (0.5x – 500) 12 + [0.5 × – (x – 500)] × 15 = – 4506x – 6,000 + 7.5x – 15x + 7,500 = – 45013.5x – 15x = – 450 + 6,000 – 7,500 – 1.5x = – 1,950

x = 1,900

_____ 1.5 Question 39: Stand Cost Corporation produces three products: A, B and C. The master budget called for the sale of 10,000 units of A at ` 12. 6000 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 fi rm actually produced and sold 11,000 units of A at `11.50, 5,000 units of B at ̀ 15.10 and 9,000 units of C at ̀ 8.55.The fi rm 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 Re 1. The materials budgeted to be used for each product were:

MaterialsProducts X Units Y Units

A 2 3B 4 1C 1 4

The fi rm 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.

Solution:Sales Variances (Sale Value Method)

Budgeted Sales Actual SalesProduct Qty.

UnitsRate (`) Amount (`) Oty.

UnitsRate(`)

Amount (`) ActualQuantity

Budgeted Price

ABC

10,0006,0008,000

12159

1,20,00090,00072,000

11,0005,0009,000

11.5015.10

8.55

1,26,50075,50076,950

1,32,00075,00081,000

24,000 2,82,000 25,000 2,78,950 2,88,000

Computation of Sales Variances:(1) Sales Value Variance = Actual Sales – Budgeted Sales = ` 2,78,950 – ` 2,82,000 = ` 3,050(A)(2) Sales Price Variance = Actual quantity (Actual price – Budgeted price) = ` 2,78,950 – ` 2,88,000 = ` 9,050(A)(3) Sales Quantiy Variance = Budgeted price (Actual Qty. – Budgeted Qty.) = ` 2,88,000 – ` 2,82,000 = ` 6,000 (F)(4) Sales Mix variance = Total actual Qty. (Budgeted price of actual mix – budgeted price of budgeted mix)

= 25,000 ` 2,88,000

___________ 25,000 units – ` 2,82,000

___________ 24,000 units = 25,000 units ` 11.52 – ` 11.75)

= ` 5,750(A)(5) Sales Sub Quantity Variance = Budgeted price of budgeted mix (Total actual quantity – Total budgeted qty.) = ` 11.75 (25,000 -24,000) = ` 11.750(F)



CheckSales Value Variance = Sales price variance + Sales quantity variance` 3,050(A) = ` 9,050(A) + ` 6,000(F)Sales Quantity Variance = Sales mix variance + Sales sub-quantity variance` 6,000(F) = ` 5,750(A) + ` 11,750(F)

Alternative Solution (Sales Margin Method)Basic Calculation:

Budgeted Margin Actual Margin Actual Quantity XBudgeted Margin

Product Qty.Units

Rate`

Amount`

Qty.Units

Rate`

`Amount

`

A 10,000 5 50,000 11,000 4.50 49,500 55,000B 6,000 6 36,000 5,000 6.10 30,500 30,000

C 8,000 3 24,000 9,000 2.55 22,950 27,00024,000 1,10,000 25,000 1,02,950 1,12,000

Computation of Variance:Sales margin variance = Actual margin – Budgeted margin = ` 1,02,950 – ` 1,10,000 = ` 7,050(A)Sales price margin variance = Actual quantity (Actual margin – Budgeted margin) = ` 1,02,950 – ` 1,12,000 = ` 9,050(A)Sales margin mix variance = Total actual quantity (Budgeted margin of actual mix – budgeted margin of

budgeted mix)

= 25,000 units ( ` 1,12,000 ___________

25,000 units –

` 1,10,000 ___________

24,000 units )

= ` 2,583 (A)Sales margin sub quantity variance = Budgeted margin of budgeted mix X (Total actual Qty. – Total budgeted qty.)

= ` 1,10,000

___________ 24,000 units × (25,000 units – 24,000 units)

= ` 4,583(F)Material Variances:Basic CalculationsStandard and actual costs of material for actual output, i.e. 11,000 units of A, 5,000 units of B and 9,000 units of C and standard cost of actual input material.

Material Standard Cost Actual Cost Actual quantity ×

Standard price Qty

UnitsRate

`Amount

`Qty.

Units` Rate Amount

` X 51,000 2 1,02,000 54,000 1,09,620 1,08,000Y 74,000 1 74,000 72,000 73,000 72,000

1,25,000 1,76,000 1,26,000 1,82,620 1,80,000

11,000 × 2 + 5,000 × 4 + 9,000 × 1 = 51,00011,000 × 3 + 5,000 × 1 + 9,000 × 4 = 74,000



Computation of variances:Material cost Variance = Standard cost – Actual cost = ` 1,76,000 –1,82,620 = ` 6,620 (A)Material Price variance = Actual quantity (Standard price – Actual price) = ` 1,80,000 – ` 1,82,620 = ` 2,620(A)Material mix variance = Total quantity (Standard price of standard mix – Standard price of actual mix)

= 1,26,000 units ( ` 1,76,000 ____________ 1,25,000 units –

` 1,80,000 ____________ 1,26,000 units ) = ` 2,592(A)

Material yield variance = Standard price of standard mix X (Total standard quantity – Total actual quantity)

= ` 1,76,000

____________ 1,25,000 units (` 1,25,000 – ` 1,26,000)

= ` 1,408 (A)Check:Material Cost Variance = Material price variance + Material mix variance + Material yield variance` 6,620(A) = ` 2,620(A) + ` 2,592(A) +` 1,408(A)

Question 40: Ravi, Richard, Rahim and Roop Singh are regional salesmen distributing the product of Super Perfumes Ltd. The selling price of the product is ` 400 per unit. The sales quota and the standard selling expenses for the year are:

Sales man Sales Quota`

Standard selling exp.`

Ravi 7,50,000 2,25,000

Richard 9,00,000 2,47,500

Rahim 11,50,000 2,87,500

Roop Singh 6,00,000 2,25,000

Actual data for the year were as follows:

Ravi Richard Rahim Roopsingh

Days on fi eld work 200 175 225 250

km covered 20,000 18,000 18,000 30,000

` ` ` `

Sales 8,00,000 10,00,000 10,50,000 5,20,000

Salary 80,000 80,000 80,000 80,000

Free Samples 9,000 7,500 5,375 8,000

Post and Stationary 8,000 9,000 10,000 6,000

Other expenses. 9,000 5,000 4,000 10,000

The salesmen are allowed conveyance allowance of ` 1.50 per km and a daily allowance of ` 80 per day for the days spent on fi eldwork. Ravi gets a commission of 6% on sales and others are given a commission of 5% on sales. Corporate sales offi ce expenses are chargeable at the rate of ` 30 per unit sold in the case of Ravi and Richard and ` 40 per unit in the case of Rahim and Roop Singh.

Required: Prepare a schedule showing the selling cost variances by salesmen.



Solution

Working Note:

Particulars Ravi Richard Rahim Roop Singh(1) Standard sales units: 1,875 2,250 2,875 1,500Sales quota/` 400(ii) Standard selling expenses per unit(`) 120 110 100 150(std. selling expenses/Std. sales units)(iii) Actual sales units: 2,000 2,500 2,625 1,300Actual sales/`, 400(iv) Actual selling costs ` ` ` `

Daily allowance 16,000 14,000 18,000 20,000Conveyance allowance 30,000 27,000 27,000 45,000Salaries 80,000 80,000 80,000 80,000Free samples 9,000 7,500 5,375 8,000Postage and stationery 8,000 9,000 10,000 6,000Other expenses 9,000 5,000 4,000 10,000Commission on sales 48,000 50,000 52,500 26,000Corporate sales offi ce expenses 60,000 75,000 1,05,000 52,000

Total actual selling cost 2,60,000 2,67,500 3,01,875 2,47,000

(v) Standard selling cost 2,40,000 2,75,000 2,62,500 1,95,000(Actual units sold × Std. selling expenses per unit)

Since all the selling expenses have been related to sales units, only one variance can be calculated by comparing the standard and actual selling costs as is shown in the schedule below:

Schedule showing the selling cost variance by salesman

ParticularsRavi

`Richard

`Rahim

`Roop Singh

`Total

`

Standard selling 2,40,000 2,75,000 2,62,500 1,95,000 9,72,500Expenses (Refer to Working Note (v)Actual SellingExpenses (Refer to Working Note (iv) 2,60,000 2,67,500 3,01,875 2,47,000 10,76,375Selling cost variance (20,000)

(A)7,500

(A)(39,375)

(A)(52,000)

(A)(1,03,875)

(A)

A = AdverseF = Favourable = 1,300Question 41: Global Ltd is engaged in marketing of wide range of consumer goods, A, B, C and D are the zonal sales offi cers for four zones. The company fi xes annual sales target for them individually.You are furnished with the following: 1. The Standard costs of sales target in respect A, B, C and D are ` 5,00,000, ` 3,75,000, ` 4,00,000 and `

4,25,000, respectively. 2. A, B, C and D respectively earned ` 29,900, ` 23,500, ` 24,500 and ` 25,800 as commission at 5% on

actual sales affected by them during the previous year. 3. The relevant variances, as computed by a qualifi ed cost accountant, are as follows:

Particulars A B C DSales price variance 4,000 (F) 6,000(A) 5,000(A) 2,000(A)Sales Volume variance 6,000(A) 26,000(F) 15,000(F) 8,000(F)Sales margin mix variance 14,000(A) 8,000(F) 17,000(F) 3,000(A)

= Adverse variance and (F) = Favorable variance.



Required: 1. Compute the amount of sales target fi xed and the actual amount of contribution earned in case of each of the

zonal sales offi cer. 2. Evaluate the overall performance of these zonal sales offi cers taking three relevant base factors and then

recommend whose performance is the best.

Solution: Statement of Zone-Wise Sales Target Fixed and the Actual Amount of Contribution Earned

Particulars (`’000)Zonal Sales Offi cers A B C DCommission Earned 29.9 2.523.5 24.5 25.8Actual Sales (Commission earned × 100/5) 598 470 490 516Sales Price Variance 4(F) 6(F) 5(A) 2(A)Sales Volume Variance 6(A) 26(F) 15(F) 8(F)

SalesTarget Budgeted Sales

600 450 480 510

Standard Cost of Sales Target 500 375 400 425

Standard Budgeted Margin 100 75 80 85

Sales Margin Mix Variance 14(A) 8(F) 17(F) 3(A)Sales Price Variance 4(F) 6(A) 5(A) 2(A)

90 77 92 80

Note: The problem does not provide information about sales margin quantity variance. Hence, for computing actual contribution the sales margin variances has been assumed to be zero.Evaluation of the PerformanceBase Factor Zonal Sales Offi cers A B C D1. Effi ciency in achieving target sales: (a) Whether target achieved No Yes Yes Yes Actual Sales 598×100 470×100 490×100 516×100 Target Sales 600 450 480 510 ActualSales to Target Sales Ratio 99.67 104.4 102.08 101.18 Ranking IV I II III2. (a) Contribution earned (in `’000) 90 77 92 80 (b) Ranking II IV I III3. (a) Standard Margin Sales Target Ratio 16.67 16.67 16.67 16.67 (b) Actual Margin (i) (c) Actual Sales Ratio(%) 15.05 16.38 18.78 15.50 (d) Ranking IV II I III (e) Recommendation: The above review of performance of four offi cers based on three base factors, clearly

depicts that the performance of Mr C is the best.Statement Zone-Wise Target Fixed and the Actual Amount of Contribution Earned1. Effi ciency in achieving target sales: A B C D(A) Whether target achieved No Yes Yes YesActual Sales 598×100 470×100 490×100 516×100



Target Sales 600 450 480 510ActualSales to Target Sales Ratio 99.67 104.4 102.08 101.18 Ranking IV I II III2. (a) Contribution earned(in `’000) 90 77 92 80(b) Ranking II IV I III3. (a) Standard MarginSales Target Ratio 16.67 16.67 16.67 16.67(b) Actual Margin (i)(c) Actual Sales Ratio(%) 15.025 16.38 18.78 15.50(d) Ranking IV II I III

Question 42: Goodwill Ltd. manufactures readymade shirts of a specifi c quality in lots to each special order from its overseas customers. The standard costs for one dozen of shirts are:

`

Direct material (24 metres @ ` 11) 264

Direct labour (3 hours @ ` 49) 147

Overheads (3 hours @ ` 40) 120

Standard cost per dozen 531

During July, 1993 it worked on three orders, for which the month’s job cost records show the following:

Lot No. Units Materials Used Hours Worked

45(UK) 1,700 Doz. 40,440 meters 5,130

46(US) 1,200 Doz. 28,825 meters 2,890

47(CAN) 1,000 Doz. 24,100 meters 2,980

Additional Information: (a) The company bought 95,000 m of material during July at a cost of ̀ 10,64,000. The material price variance

is recorded when materials are purchased. All inventories are carried at cost. (b) Direct labour during July amounted to ` 5,50,000. The employees were paid at ` 50 per hour. (c) Overheads during the month amounted to ` 4,56,000. (d) A total of ` 57,60,000 was budgeted for overheads for the year 1993-94, based on estimated production of

the plant’s normal capacity of 48,000 dozen shirts annually. Overheads at the level of production are 40% fi xed and 60% variable. Overhead is applied on the basis of

direct labour hours (e) There was no work in progress at the beginning of July. During July, lot numbers 45 and 47 were completed.

All materials were issued for lot number 46 which was 80% complete as regards conversion.

Required: (A) Computation of standard cost of production of the shirts per dozen as well as in total for lot numbers 45,46

and 47. (B) Find out the variation in quantity of material used and labour hours worked for each lot as well as in total. (C) Calculate the material price variance; labour rate variance; variable overhead effi ciency variance and fi xed

overheads volume variance.



Solution: Computation of Standard Cost of Producing of Shirts per Dozen as

well as in Total (Lot Nos. 45, 46, 47)Lot No. Cost per Dozen (`) Dozens Total Standard Cost (`)45(UK) 531 1,700 9,02,700

46 (Us) 477.60 (in Progress) 1,200 5,73,120

47(CAN) 531 1,000 5,31,000

TOTAL 20,06,820

Cost of Lot No. 46(Material100% complete) ` 264.00Conversion cost (Labour and Overhead 80% complete) ` 213.60 ` 477.60

Statement of Variation Between StandardQuantity of Material and Actual Quantity of Material

Used for Each Lot as well as in TotalLot No.

1

Output in Dozens

2

Std. Qty (in Mtrs.)Per dozen

3

Total Std. Qty(in Mtrs)4 = 2 × 3

Total Actual Qty(in mtrs)

5

Variations(in Mtrs)6 = 5 – 4

45 (UK)

Total variation

1,7001,2001,000

242424

40,80028,80024,00093,600

40,44028,28524,10093,365

360(F)25(A)

100(A)235(F)

Statement of Variation between Standard Labour Hours and Actual Labour Hours Workers for Each Lot As Well As in Total

Lot No.

1

Output in Dozens

2

Std. Labour HourPer dozen

3

Total Std.Labour Hour

4

Total Actual Labour Hours

5

Variations(in Hours)6 = 5 – 4

45(UK)46 (US)47(CAN)

Total variation

1,7001,2001,000

333

5,1002,8803,000

10,980

5,1302,8902,98011,000

30(A)10(A)200(F)20(A)

(C) Material Price Variance = Actual Qty × ( Standard Rate – Actual Rate)

at the Point of Purchase = 95,000 m × ` 11 ` 10,64,000

__________ 9,50,000 m

= ` 10,45,000 – ` 10,64,000 = ` 19,000 (A)Labour Rate Variance = Actual hours × (Standard rate – Actual rate) = ` 11,000(A)Variable Overhead = Std. Variable Overhead Rate × (Std. Hours for Actual

production effi ciency variance – Actual Hours) = ` 24 × (10,980 – 11,000) = ` 480 (A)Standard Variable Overhead Rate per hour = 60% of ` 40 = ` 24Fixed Overhead volume Variance = Standard Fixed Overhead Rate per hour × (Std. Hours for

Actual Production – Budgeted Hours) = ` 16 × (10,980 hours – 12,000hours) = ` 16,320 (A) = Adverse (F) = FavourableStandard Fixed Overhead Rate per hours = 40% of ` 40 – ` 16.



Question 43: A company manufacturing two products uses standard costing system. The following date relating to the month of October have been furnished to you:

ParticularsProducts

A (`) B (`)

Standard cost per unit:Direct MaterialsDirect Wages Fixed Overheads

2 8 16 26

4 6 12 22

Unit processed/ In Process:Beginning of the month: 4,000 12,000End of the month : All materials appliedAnd 80% complete in respect of labour and overheads 8,000 12,000Units completed and transferred to ware house during the month 16,000 20,000

The following were the actual costs recorded during the month: Direct Materials purchased at standard price amount to ` 2,00,000 and the actual cost of which is ` 2,20,000. Direct materials used for consumption at standard price amount to ̀ 1,75,000. Direct wages for actual hours worked at standard wage rates were ` 4,20,000 and at actual wage rates were ` 4,12,000. Fixed overheads budgeted were ` 8,25,000 and the actual fi xed overheads incurred were ` 8,50,000.

Required: Calculate the following for the month of October. (i) Direct materials price variance at the point of consumption and at the point of purchase. (ii) Direct materials usage variance. (iii) Direct wages rate variance. (iv) Direct wages effi ciency variance. (v) Fixed overheads expenditure variance. (vi) Fixed overheads volume variance. (vii) Standard cost of work-in-progress at the end of the month.

Solution: Working Note 1

Statement of Equivalent Production (FIFO)Material Labour

Product A Opening W.I.P.(100%, 50%)

4,000 Opening W.I.P.Current

4,00012,000

–12,000

2,00012,000

Introduced 20,000 Transferred 16,000Closing W.I.P.(100%, 80%)

8,000 8,000 6,400

24,000 24,000 20,000 20,400Product B O.P. W.I.P. 12,000 O.P. W.I.P. 12,000 – 6,000

Introduced 20,000 Current 8,000 8,000 8,000Transferred 20,000W.O.W.I.P. 12,000 12,000 9,600

32,000 32,000 20,000 23,600

Working Note 2

Let per kg of material = ` 1/kgLabour Rate = ` 1/hr.



Particulars Product A Product BMaterial 2 kg × 1 = 2 4 kg × 1 = 4Labour 8 hr × 1 = 8 6 hr × 1 = 6

Overhead 8 hr × 2 = 16 6 hr × 2 = 12

Working Note 3Data for Resource Variance (A and B)

MaterialBudget Standard Actual




A 2 kg 2 kg × 20,000 = 40,000 kg

B 4 kg 4 kg × 20,000= 80,000 kg

6 kg 1 6 1,20,000 kg 1 1,20,000 1,75,000 kg 1.1 1,92,500Labour

A 8 Hr 8 × 20,400B 6 Hr 6 × 23,600

14 Hr 1 14 3,04,800 1 3,04,800 4,20,000 0.921 4,12,000

Working Note 4Data for Fixed Overhead Variance

Budgeted Hour Recovery Rate Budgeted – Overhead Actual Working Hrs.

4,12,500 2 8,25,000 4,20,000

Standard Hr. for Actual Output Recovered Actual Overhead3,04,800 3,04,800 × 2 = 6,09,600 8,50,000

Statement of VariancesSl. No. Particulars Basis Figures

1. Material Price Variance(a) At the time of purchase

(b) At the time of consumption

(S.P. – A.P.) × A.Q.Pur.(1 – 1.10) × 2,00,000(S.P. – A.P.) × A.Q. Consumed(1 – 1.10) × 1,75,000

20,000 A.

17,500 A.2. Material Usage Variance (S.Q. – A.Q.) × S.R.

(1,20,000 – 1,75,000) × 1 55,000 A.3. Wages Rate Variance (S.R. – A.R.) × A.P.Hr

(1 – 0.981) × 4,20,000 8,000 F.4. Wages Effi ciency Variance (S.Hr. – A.W.Hr) × S.R.

= (3,04,800 – 4,20,000) × 1 1,15,200 A.5. Fixed overhead Expenditure variance Budget – Actual

8,25,000 – 8,50,000 25,000 A.6. Fixed overhead Volume Variance Recovered – Budget

6,09,600 – 8,25,000 2,15,400 A.7. Standard cost of work in progress at the end

of monthA. [[2X100% + (8+16) 80%] 8000 1,69,600

B. [[4X100% + (6+12) 80%] 12,000 2,20,800

Question 44: 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 fi nancial 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 5 hrs @ ` 40 per hour Overhead per return 5 hrs @ ` 20 per hourFor 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.

March 1 Return in Process(25% complete) 200 Nos.Return started in March 825 Nos.

March 31 Return in Process ( 80% complete) 125 Nos.Cost DataMarch1 Return in Process

Labour ` 12,000Overheads 5,000

March 1 to 31 Labour ( 4,000 hrs) 1,78,000

Overhead 90,000

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 effi ciency variance as well as total overhead volume and overhead budget

variances.

Solution:(a) Statement of Cost (Weighted Avg.)

Labour Overhead

Current 1,78,000 90,000

Opening Cost 12,000 5,000

Total A 1,90,000 95,000

Qty. (WN1) B 1,000 1,000

Rate (` PU) A ÷ B 190 95

(b) Calculation of Actual cost of closing W.I.P.Labour → 190 × 100 19,000Overhead → 95 × 100 9,500

28,500

(c) Standard Cost

Labour → 5 Hr × 40 200Overhead → 5 Hr × 20 100

300

(d) Statement of VariancesSl. No. Particulars Basis Figures

1. Labour Rate Variance (S.R. – A.R.) × A.P.Hr

⎛ ⎞−⎜ ⎟⎝ ⎠

1,78,000404,000

× 4,00018,000 A



2. Labour Effi ciency Variance (S.Hr – A.W.Hr) × S.R.(4,750 – 4,000) × 40 30,000 A

3. Overhead Volume Variance Received – Budget95,000 – 98,000 3,000 A

4. Overhead Budget/Expenditure Variance Budget – Actual98,000 – 90,000 8,000 F.

Working Note 1Statement of Equivalent Production (Weighted Avg. Method)

Particulars Lab. OHOP. W.I.P. 200 Transferred 900 900 900Units Started 825 Clo. W.I.P. (80%) 125 100 100

1,025 1,025 1000 1000

Working Note 2Statement of Equivalent Production (FIFO) for Variance Analysis

Labour OverheadOP. W.I.P. (25 k) 200 OP. W.I.P. 200 150 150

Current 700 700 700Units Started 825 Transferred 900

Clo. W.I.P. (80%) 125 100 100

1,025 1,025 950 950


Budgeted Hour Recovery Rate Budgeted Fixed – OH A.W.Hr49,000 20 98,000 4,000

Standard Hour Recovered Actual Overhead5 Hr × 950 = 4,750 4,750 × 20 = 95,000 90,000

Question 45 (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: ` per kg of fi nished productDirect mat.-2 kg @ ` 10 per kg 20Direct labour- 3 hrs @ ` 20 per hour 60Fixed overhead (Recovered on labour hours) 90Total 170Budgeted output for the period is 1,000 kgActual production and cost data for the period are as follows:Actual production from Current Input 950 kgDirect material 2900 kg at ` 32.000Direct labour 3300 at ` 68,000Fixed overheads ` 88,000Stocks:Op.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: Computation of cost variances in as much detail as possible and process Cost Reconciliation statement.

Solution: Statement of Variances

Sl. No. Particulars Basis Figures1. Material Price Variance (S.P. – A.P.) × A.Q.

(10 – 11.034) × 2,900 3,000 A.2. Material Usage Variance (S.Q. – A.Q.) × S.R.

(2,800 – 2,900) × 10 1,000 A.3. Material Cost Variance S.C. – A.C.

28,000 – 32,000 4,000 A.4. Labour Rate Variance (S.R. – A.R.) × A. Pay. Hr

(20 – 20.60) × 3,300 2,000 A.5. Labour Effi ciency Variance (S. Hr – A.W.Hr) × S.R.

(3,420 – 3,300) × 20 2,400 F.6. Labour Cost Variance S.C. – A.C.

68,400 – 68,000 400 Fav.7. Fixed OH Volume Variance Recovered – Budget

1,02,600 – 90,000 12,600 F.8. Fixed Overhead Effi ciency Variance (S.Hr. – A.W.Hr) × S.R.

(3,420 – 3,300) × 30 3,600 F.9. Fixed Overhead Capacity Variance (A.W.Hr – Bud. Hr) × R.R.

(3,300 – 3,000) × 30 9,000 F.10. Fixed Overhead Expense Variance Budget – Actual

90,000 – 88,000 2,000 F.11. Fixed OH

Cost VarianceRecovered – Actual1,02,600 – 88,000 14,600 F.

Working Note 1Statement of Equivalent Production (FIFO)

Material Lab – OHOP. W.I.P. (100%, 60%)

250 OpeningCurrent

250950

–950

100950

Transferred → 1,200Introduced 1,400

Clo. W.I.P. (80%) 450 450 901,650 1,650 1,400

(Actual output for mat.)

1,140(Actual output for

labour)

Working Note 2Data for Resource Variance

Standard ActualQty. Rate Amount (`) Qty. Rate Amount (`)

Material (kg) (1,400) 2,800 10 28,000 2,900 11.034 32,000Labour (1,140) 3,420 20 68,400 3,300 20.60 68,000


Budgeted Hour Recovery Rate Budgeted Fixed – OH Actual Working Hour3,000 (3 Hr × 1,000) 30/- 90,000 (90 × 1,000) 3,300



Standard Hour Recovered Actual Overhead3,420 (3 Hr × 1140) 1,02,600 88,000

Question 46: A single product company has prepared the following cost sheet based on 8,000 units of output per month:

`Direct Materials 1.5 kg @ ` 24 per kg 36.00Direct Labour 3 hrs @ ` 4 per hr 12.00Factory Overheads 12.00Total 60.00

The fl exible budget for factory overheads is as under:

Output (units) 6,000 7,500 9,000 10,500

Factory Overheads ` 81,600 92,400 1,03,200 1,14,000

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 300 units Materials 100% complete Labour and Overheads 60% completeClosing WIP 200 units Materials 50% complete Labour and Overhead 40% complete

Required: Analyze the variances.

Solution: Statement of Variances

Sl. No. Particulars Basis Figures (`)

1. Material Price Variance (S.P. – A.P.) × A.Q.(24 – 23.75) × 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 – 2,66,570 550 F.

4. Variable Overhead Price Variance (S.R. – A.R.) × A.W.Hr ???? 4,480 A

5. Variable Overhead Expenditure Variance (S.Hr – A.W.Hr) × S.R.(22,560 × 22,400) × 2.4 384 F.

6. Fixed overhead expenditure variance Budget – Actual38,400 – 38,200 200 F.

7. Fixed overhead volume variance Recovered – Budget36,096 – 38,200 2,304 A.

8. Fixed overhead effi ciency variance (S.Hr – A.W.Hr) × S.R.(22,560 – 22,400) × 1.6 256 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.Hr(4 – 4.3) × 22,400 6,720 A.

11. Labour effi ciency variance (S.Hr – A.W.Hr) × S.R.(22,560 – 22,400) × 4 640 F.

Working Note 1Calculation of Variable – OH – Rate per unit

Variable overhead per unit =

Change in overheadChange in output =

−−

92,400 81,6007,500 6,000 = =

10,800 7.21,500

Working Note 2Statement of Equivalent Production

Particulars Material Lab – OHOP. W.I.P. (100%, 60%) 300 Opening

Current300

7,320—

950 100 950

Transferred → 7,600Introduced (B.f) 7,520 Clo. W.I.P.

(50%, 40%)200 100 80

7,820 7,820 7,420 7,520


Particulars Standard ActualQty. Rate Amount Qty. Rate Amount

Material 7,420 × 1.5 = 11,130 24 2,67,120 11,224 23.75 2,66,570Labour 7,520 × 3 = 22,560 4 90,240 22,400 4.3 96,320Variable overhead

7,520 × 3 = 22,560 =7.2 2.43

54,144 22,400 2.60 58,240

Working Note 4Data for Fixed – Overhead Variance

Budgeted Hour Recovery Rate Budgeted fi xed overhead Actual working hour

24,000 Hr (1,000 × 3) =4.8 1.63

` 38,400 22,400

Standard Hour Recovered Actual Fixed – OH22,560 (3 Hr × 7,520) 22,560 × 1.6 = 36,096 96,440 – 58,240 = 38,200

Question 47: Standard cost sheet per unit of output is as under Direct material 3 Pcs. @ ` 2.15 ` 6.45Direct labour:Dept A 2 hrs @ ` 1.75 3.50Dept B 4 hrs @ ` 1.50 6.00 ` 9.50Overheads:Dept. A 2 hrs @ ` 0.50 1.00Dept B 4 hrs @ ` 1.00 4.00 ` 5.00

Total ` 20.95



Transactions for the period are as under:Materials purchased and consumed: 8,600 pcs. @ ` 2.50 eachLabour Time Spent Dept. A. 5,200 hours Dept. B. 12,000 hoursThere is no change in labour rates:Actual factory overheads are: Dept. A. ` 3,000 Dept. B. ` 12,500Units produced: Dept. A. 2,800 Dept. B. 2,800Budgeted overheads: Dept. A. ` 3,000 Dept. 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.

Solution: Journal Entry (Under Single Plan) in Department A

Particulars Amount (`)

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)

18,4903,010

21,500

2. Creditors A/c Dr To Bank

21,50021,500

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)

18,060430

18,490

4. Wages Control A/c. Dr (S.R. × A.W.Hr) To wages payable A/c. (S.R. × A.P.Hr)(Being labour expenses due)

9,1009,100

5. Wages payable A/c. Dr To Bank A/c.

9,1009,100

6. W.I.P. control A/c Dr. To wages control A/c To labour Effi ciency variance A/c.

9,8009,100

7007. W.I.P. Control A/c Dr

Overhead cost variance A/c Dr To Bank

2,800200

30008. Department – B A/c

To W.I.P. Control A/c30,66030,660

(Being balance of W.I.P. Control A/c of department ‘A’ transferred to department – B)



In Department – B Journal EntryParticulars Amount (`)

1. W.I.P. Control A/c Dr To Department A A/c.

30,66030,660

2. Wages Control A/c DrLabour Rate variance A/c Dr To wages payable A/c

18,000NIL

18,0003. Wages Payable A/c Dr

To Bank18,00018,000

4. W.I.P. control A/c Dr.Labour Effi ciency variance A/c Dr To wages control A/c

16,8001,200

18,0005. W.I.P. control A/c Dr

Overhead cost variance A/c Dr To Bank

11,2001,300

12,500

Question 48 (Incomplete Ledger-Variance Analysis – Missing Figures): Upasana Ltd. manufactures paint. It uses a standard costing system and the variances are reported to the management on fortnightly basis. A fi re destroyed some important records of the company. You have been able to collect the following information for a fortnight from the spoiled papers/records as a result of consultation with accounting personnel: (a) The paint required two types of raw materials RM1 and RM2.The standard quantity of RM2 in fi nal

product is 5 liters and standard cost thereof is ` 36 per liter. (b) The company purchased 200 kg of RM1 and 550 liters of RM2 during that fortnight . (c) The standard wage rate is ` 24 per labour hour. Actual labour hours were 460 during that fortnight. (d) Variances as disclosed from some spoiled papers are: i. Price variance (RM2) ` 1,320 (A) ii. Usage variance (RM1) ` 240 (F) iii. Labour effi ciency variance ` 1,440 (A) iv. Some incomplete ledger entries for the fortnight reveal

` `

1. Sundry Creditors Purchase of raw materials 25,4402. RM2

Opening balance 3,600 Closing balance 8,2803. RM1

Opening balance 0 3,600Closing balance 1,200

4.Works-in progressOpening balance 0RM2 14,400 Closing balance 0

5. WagesPaid and outstanding 10,350

Required: Compute meaningful variances to be presented to the management.

Solution: Key computation for ascertaining missing fi gure:1. Standard cost of RM2 in one unit of fi nal product . 5 l at ` 36 = ` 180

Actual output of point = 14,400

______ 180 = 80 units of paint.



2. Standard quantity of RM 2 required for production of 80 units of paint. 80 × 5 = 400 l or 14,400 / 36 = 400 l 3. AQ of RM 2 purchased =550 l Opening balance 3,600 /36 = 100 l Add: Purchased 550 650 Less: Closing balance 8,280/36 = 230 AQ of RM 2 consumed = 420 l 4. Actual rate per liter of RM 2 This can be ascertained by means of price variance. Price variance = AQ (SR – AR ) 1,320 A = 550 (36 – AR ) Less: 1,320 = 19,800 – 550 AR

AR = 19,800 + 1,320

_____________ 550 = ` 38.40 per l

1. Standard Rate per kg. of RM 1 i.e., ` 4,800/200 kg = ` 24 per kg of RM 12. AQ of RM 1 issued to production of 80 units of paint. This can be ascertained by means of usage variance of RM

1. Usage variance = SR (SQ – AQ) 240 = 24 (SQ – 150) 240 = 24 SQ – 3,600

SQ = 3,600 + 240

__________ 24 = 160 kg

8. Actual Rate per kg. of RM 1. Total cost of purchase of Raw materials = 25,440 Less: Actual purchase cost of RM 2 = 550 × 38.40 = 21,120 Actual purchase cost of RM 1: 200 kg = 4,320 Actual Rate per kg of RM 1 = ` 4,320 / 200 kg = ` 21.60 per kg 9. Actual Rate per labour hour = ` 10,350 / 460 hours = ` 22.50 per labour hour. 10. SH for actual production of 80 units of paint:This can be ascertained by means of labour Effi ciency Variance (LEV). LEV = SR (SH – AHP) 1,440 A = 24 (SH – 460) (–) 1,440 = 24 SH – 11,040

SH = 11,040 + 1,440

_____________ 24 = 400

Solution: 1. Material Variances:SC ` RM 1. 160 kg at ` 24 = 3,840RM 2. 400 litres at ` 36 = 14,400 18,240

AC ` RM 1. 150 kg. at ` 21.60 3,240RM 2. 420 × 38.40 16,128 19,368

(a) Price Variance = AQ (SR – AR) RM 1 = 150 (24 – 21.60) = 360 F RM 2 = 420 (36 – 38.40) = 1.008 A ` 648 A(b) Usage Variance = Sr (SQ –AQ)



RM 1 = 24 (160 – 150) = 240 F RM 2 = 36 ( 400 – 420) = 720 A 480 A(c) Material Cost Variance (MCV) = SC – AC 18,240 – 19,368 = ` 1,128 A Reconciliation : MCV = price V + usage V. 1,128 A = 648 A + 480 A3. Labour variances:

SC ` AC `400 hours at ` 24 = 9,600 460 × 22.50 = 10,350

(a) Labour Rate variances = AHP (SR – AR) = 460 (24 – 22.50) = 690 F(b) Labour Effy. Variance = SR (SH – AHP) = 24(400 – 460) = 1,440 A(c) Labour Cost Variance = SC – AC = 9,600 – 10,350 = 750 A

Solution: Variance: 480,240,1,320,720, 690, 1,4440.

RECONCILIATION BASED QUESTION

Question 49: The budget output of a single product manufacturing company for 1984 –85 was 5,000 units. The fi nancial results in respect of the actual out put of 4,800 units achieved during the year were as under:

Particulars Amount (`)Direct material 29,700Direct wages 44,700Variable overheads 72,750Fixed overheads 39,000Profi t 36,600Sales 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` `

Material Price — 300Material usage — 600Wage Rate 750 —Labour Effi ciency — 2,250Variable Overhead Expenses 3,000 —Variable Overhead Effi ciency — 3,750Fixed Overhead Expense — 1,500Selling Price 6,750 —

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 profi t and the actual profi t.



Solution: Statement showing standard cost sheet per unit and Original Budget

Particulars Standard cost per unit (`)

Original Budget (`) 5,000 units

Material (See WN 1) 6 30,000Labour (See WN 2) 9 45,000Variable overhead (See WN 3) 15 75,000Fixed overhead (See WN 4) 7.5 37,500Total Cost 37.5 1,87,500Prorit 7.5 37,500Selling price (See WN 5) 45 2,25,000

Statement of Reconciliation (Marginal)

Particulars `

Budgeted Profi t 37,500Sales Variance:Price Variance 6,750 F.Volume Variance 3,000 A.(B.Q. – A.Q.) × (F.C. + Pro.P.U.) 200 × (7.5 + 7.5)Cost Variances:Material Cost Variance 900 ALabour Cost Variance 1,500 AVariable Overhead Cost Variance 750 AFixed Overhead Expenditure Variance 1,500 AFixed Overhead Volume Variance N.A.Actual Profi t 36,600

Working Note 1M.C.V. = M.P.V. + M.U.V. = – 300 – 600 = – 900M.C.V. = Standard Cost – Actual Cost–900 = Standard Cost – 29,700∴ S.C. = 28,800Budget Cost P.U. × Actual output = 28,800

Budget Cost P.U. = 28,800

______ 4,800 = 6

Working Note 2Labour Cost Variance = C.R.V. + C.E.V. = 750 + (– 2,250) = – 1,500L.C.V. = S.C. – A.C.– 1,500 = S.C. – 44,700S.C. = 44,700 – 1,500∴ S.C. = 43,200S.C. implies labour cost for actual output



Working Note 3V – OH Cost Variance = V. OH Exp. Variance + V – OH Volume Variance = 3,000 + (– 3,750) = – 750∴ V – OH Cost Variance = S.C. – A.C.– 750 = S.C. – 72,750S.C. = 72,000Standard cost = Budgeted cost for actual output72,000 = Budgeted cost per unit × 4,800

∴ Budgeted Cost per unit = 72,000

______ 4,800 = 15

Working Note 4Fixed - OH Expenditure Variance = Budgeted - OH – Actual - OH– 1,500 = Bud - OH – 39,000∴ Budgeted Overhead = – 1,500 + 39,000 = 37,500Working Note 5Sales Price Variance = (B.S.P. – A.S.P.) × A.Qty

– 6,750 = B.S.P. – ( 2,22,750 ________ 4,800 × 4,800 )

B.S.P. = –6,750

______ 4,800 + 2,22,750

________ 4,800

B.S.P. = –6,750 + 2,22,750

_______________ 4,800 ∴ B.S.P. = ` 45Working Note 6Sales margin volume variance = Change in Qty × Budgeted Contribution per unit

Budget ActualQuantity 5,000 4,800S.P. 45 45V.C. (M + C + OH) 30 30Total ContributionLess: Fixed Cost

75,00037,500

72,00037,500

Profi t 37,500 34,500

= (B.Q. – A.Q.) × Bud. Cont. P.U. = (5,000 – 4,800) × (7.5 + 7.5) = 3,000 A

Question 50: The Summarised results of a company for the two years ended December 31st are given below for 2 years — (` in lakh) (` in lakh)Sales 770 600Direct Material 324 300Direct wages 137 120Variable Overheads 69 60Fixed Overheads 150 80Profi t 90 40



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 fi gures 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 profi t in year 2.

Solution: Let Selling Price be ` 100 per unit for I year. ThenIInd year Ist Year

Sales 7,70,00,000 6,00,00,000S.P. 110 100Quantity Sold 7,00,000 6,00,000

Reconciliation StatementParticulars Basis ` in lakh

Budgeted Profi t 40Sales Variance Price Variance (100 – 110) × 7,00,000

(B.S.P. – A.S.P.) × A. QtyVolume Variance (B.Q. – A.Q.) × Bud. Pri. P.U(6,00,000 – 7,00,000) × 6.6666

70 F.

6.66F.

Cost Variance Fixed – OH Volume Variance Received – Budget (93.33 – 80)Fixed – OH Expenditure Variance(Budget – Actual)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 Effi ciency Variance(S.Hr – A.Hr) × S.R.Variable – OH Expenditure Variance(S.R. – A.R.) × A.W.HrVariable – OH Effi ciency Variance(S.Hr – A.Hr) × S.R.

13.33 F.

70 A.

13.5 F.

12.5 F.

7 A.

10 F.

4 A.

5 F.Actual Profi t 90


MaterialBudget Standard Actual

Qty. Rate (` in lakh)Amount Qty. Rate (` in lakh)

Amount Qty. Rate (` in lakh)Amount

Material 1,20,000 250 300 1,40,000 250 350 1,35,000 240 324Labour 24,00,000 5 120 28,00,000 5 140 26,00,000 5.269 137V – OH 24,00,000 2.5 60 28,00,000 2.5 70 26,00,000 2.65 69

480 540 530

Working Note 2Data for fi xed overhead variance

Budgeted Hour Recovery Rate Budgeted fi xed overhead6,00,000 13.33 80,00,000

Actual output Recovered Actual7,00,000 93,33,333 1,50,00,000



Working Note 3Calculation of Budget profi t per unitQty. → 6,00,000S.P. → 100V.C. → 80Fixed Cost → 80,00,000

Budgeted profi t per unit = × −6,00,000 20 80,00,000

6,00,000

= −1,20,00,000 80,00,000

6,00,000

= 40,00,0006,00,000

∴ Budgeted profi t per unit = 6.666

Question 51: The standard cost sheet of a company based on the normal output of 30,000 units for a quarter is as under: `

Direct Materials 4 kg. @ ` 2 per kg. 8.00 Direct Wages 6 Hours @ ` 4 per hour 24.00 Overheads 50% of Direct Wages 12.00 Total Costs 44.00 Profi t 6.00 Selling Price 50.00The budgeted fi xed overheads amount to ` 1,44,000 per quarter and it is included in the overhead cost given above. On the basis of the budgeted activity of 36,000 units, the company estimated the profi t for the second quarter of the year as under: `

Direct Material 2,88,000 Direct Wages 8,64,000 Overheads(50% of Wages) 4,32,000 Total Costs 15,84,000 Sales 18,00,000 Profi t 2,16,000The cost records revealed the following actual data for the second quarter of the year:Production 25,000 unitsDirect materials consumed 96,000 kg. At ` 2.25 per kg.Direct wages paid, 1,60,000 hours at ` 4.10 per hour. Out of which 6,000hours being idle time were not recorded on production.Overheads ` 3,32,000 out of which ` 1,50,000 were fi xed.Sales 25,000 units at an average price of ` 51.50 per unit.

Required:Prepare a statement of actual Profi t/Loss for the second quarter of the year.

(i) Analyze the variance and present an operating statement reconciling the budgeted profi t with actual profi t.



Solution: STATEMENT OF ACTUAL PROFIT (LOSS)

(For the second quarter of the year) `

1. Sales Revenue: 25,000 units × ` 51.50 12,87,500 Direct Material 96,000 hours × ` 225 2,16,000 Direct wages 1,60,000 hrs × ` 4.10 6,56,000 Overheads 3,32,0002. Total Cost 12,04,0003. Profi t (Loss) (1) – (2) 83,500

OPERATING STATEMENT(Reconciling the budgeted Profi t with Actual Profi t)

Particulars WorkingNotes Variable Actual

`

Favourable`

Adverse`

Budgeted Profi t (36,000 × 6) — — 2,16,000Sales VarianceSales Volume margin varianceSales Price Variance

1(a)1©1(b)

——

37,500

—66,000

———

Net variance 32,5003. Profi t before adjustment of Cost variance (1) – ( 2) 1,87,5001. Material Price Usage2. Labour Rate Effi ciency Idle time

2(i) (a)2(i) (b)

2(ii) (b)21(ii) (c)2(ii) (d)

8,000

——

24,000–

16,00016,00024,000

——

———

Variable Overhead Expenditure 3 (iii) 2,800 – —Effi ciencyFixed OverheadExpenditureEffi ciencyCapacity

3(iv)

3(vi)3(vii)3(viii)

—

———

4,800

6,0003,200

20,800

—

———

10,800 1,14,800 1,04,000Actual Profi t (2) – (3) 83,500

Working Notes:1. Sales Variance Based on Profi t(a) Sales Value variancea. Statement of actual profi t (Loss) (For the second quarter of the year) `

1. Sales Revenue: 25,000 units × ` 51.50 12,87,500 Direct material 96,000hrs. × ` 2.25 2,16,000 Direct wages1,60,000 hrs. × 6,56,000 Overheads 3,32,0002. Total Cost 12,04,0003: Profi t (loss) (1) – (2) 83,500



Operating statement (Reconciling the budgeted profi t with actual profi t)

ParticularsWorking

NotesVaria ble

ActualFavourable (`) Adverse (`)1: Budgeted Profi t (36,000 × 6)2: Sales variances(i) Sales Volume marginVariance(ii) Sales price variance(iii) Net variance

1(a)

1 ( c)1 (b)

——

—37,500

——

66,000—

2,16,00—

——

32,5003. Profi t before adjustmentof cost variances (i) – (2)1. MaterialPriceUsageLabourRateEffi ciencyIdle timeVariable Overhead ExpenditureEffi ciencyFixed overheadExpenditureEffi ciencyCapacity

Actual profi t (2) – (3)

2 (1) (a) 2 (1) (b)

2 (ii) (b) 2 1(ii) I 2 (ii) (d)

3(iii) 3 (iv)

3 (vi)3 (vii)3 (viii)

— 8,000

———

2,800—

———

10,800

24,000—

16,00016,00024,000

—4,800

6,000 3,200

20,8001,14,800

1,87,500

——

—–

——–

———

1,04,00083,500

Working Notes1: Sales Variances Based on Profi t:(a) Sales Value Variances = Budgeted Profi t – Actual Profi t = 2,16,000 – 83,500 = ` 1,32,500 (Adverse)(b) Sales Price Variance = Actual Qty. Sold X (Std. Price – Actual Price)

Question 52: The Standard Cost Card of producing one unit of Item ‘Q’ is as under:Particulars Amount (`)Direct Material A – 12 kg. @ ` 10 = ` 120

B – 5 kg. @ ` 6 = ` 30Direct Wages 5 hrs @ ` 3 = ` 15Fixed Production Overheads = ` 35Total Standard Cost = ` 200Standard Gross Profi t = ` 50Standard Sale Price = ` 250

Fixed Production Overhead is absorbed an expected annual output of 13,200 units. Actual results for the month of September, 1997 are as under:Particulars Amount (`)Actual Production: 1,000 unitSales 1,000 unit @ ` 250 = 2,50,000Direct Material A – 11,000 kg., 1,21,000

B – 5,200 kg., = 28,600Direct Wages – 5,500 hrs = 17,500Fixed Overheads = 39,000

2,06,100

Gross Profi t = 43,900



Required: Calculate all variances. Material price variance is taken out at the time of receipt of material. Material purchased were: 12,000 kg of ‘A’ @ ` 11 and 5,000 Kg of ‘B’ @ ` 5.50

Solution: Basic data:

(1) Statement showing standard and actual costs of material For 1,000 units of output and standard cost in actual input

Standard Cost Actual cost Standard cost of actual input =(Actual quantity × Standard price)

MatrialsQty.(kg)

Price(`)

Amount (`)

Qty.(`)

Price (`)

Amount (`)

Actual Qty.(Kg)

StandardPrice/kg

(`)

Amount (`)

A

B

12,000

5,000

10

6

1,20,000

30,000

11,000

5,200

11

5.50

1,21,000

28,600

11,000

5,200

10

6

1,10,000

31,200

1,50,000 1,49,600 1,41,200

1. Standard yield (units) = 1,000 units

__________ 17,000 kg × 16,200 kg = 952.941764 units aprox.

2. Statement showing standard and actual labour cost of 1000 units

Produced and standard cost of actual labour hrs. Hours Rate P.h.

(`)Amount

(`)Hours Rate P.h

(`)Amount Hours Rate p.h.

(`)Amount

(`)5,000 3 15,000 5,500 3,1818 17,500 5,500 3 17,500

3. OverheadParticulars Budgeted Actual

Fixed overhead (`)HoursOutput (units)Standard time p.u. (hrs)Standard fi xed overhead p.u. (`)Standard fi xed overhead rate p.h.(`)

38,500 5,500 1,100

5 35 7

39,000 5,500 1,000

Computation of material variances (Refer to Basic data 1): Material Cost variance = Standard cost – Actual cost = ` 1,50,000 – ` 1,49,600 = ` 400 (Fav.) Material Price variance = Actual quantity (Std. price – Actual price) = 11,000 kgs. (` 10 – ` 11) + 5,200 kgs. (` 6 – ` 5.50) = ` 11,000 (Adv.) + ` 2,600 (Fav.) = ` 8,400 (Adv.) Material Usage variance = Standard price (Standard quantity – Actual quantity) = ` (12,000 kgs – 11,000 kgs)+ ` 6(5,000 kgs – 5,200 kgs) = ` 10,000 (Fav.) + ` 1,200 (Adv.) = ` 8,400 (Adv.)

Material Mix variance = Std. price of

_____________ std. mix per kg – Std. price of

_______________ actual mix per kg

= 16,000 kgs ` 1,50,000

__________ 17,000 kgs – ` 1,41,200

_________ 16,200 kgs

= ` 1,741.18 (Fav.)



Material Yield Variance = Std. rate (Actual yield – Std. yield) = ` 150 {1,000 units – 952.9411764 units} = ` 7,058.82 (Fav.) Material purchase variance: = Actual quantity of material purchased (std. price per kg – Actual price per kg.) = 12,000 kg (` 10 – ` 11) + 5,000 kg (` 6 – ` 5.50) = ` 12,000 (Adv.) + ` 2,500 (Fav.) = ` 9,500 (Adv.) Computation of labour variance (Refer to Basis data 2): Labour variance = (Standard cost – Actual cost) = ` 15,000 – ` 17,500 = ` 2,500 (Adv.) Labour rate variance = Actual hrs (Std. rate – Actual rate) = 5,500 (` 3 – ` 3.1818) = ` 1,000 (Adv.) Labour effi ciency variance = Std. rate p.h. (Std. hours – Actual hours) = ` 3(5,000 hrs. – 5,500 hrs.) = ` 1,500(Adv.) Computation of fi xed overhead variance Total Fixed overhead variance: = Fixed overhead absorbed – Actual fi xed overhead = 1,000 units × ` 35 – ` 39,000 = ` 35,000 – ` 39,000 = ` 4,000 (Adv.) Fixed Overhead expenditure variance: = Budgeted fi xed overhead – Actual fi xed overhead = ` 38,500 – ` 39,000 = ` 500 (Adv.) Fixed Overhead Volume variance: = Std. fi xed overhead rate per unit {Actual output – Budgeted output) = ` 35{1,000 units – 1,100 units} = ` 3,500 (Adv.) Effi ciency variance: = Std. fi xed overhead rate per unit {Actual output – Budgeted output} = ` 35 {1,000 units – 1,100 units} = ` 3,500 (Adv.)

Question 53: Jumbo Enterprises manufactures one product, and the entire product is sold as soon as it is produced. There is no opening or closing stocks and work in progress is negligible. The company operates a standard costing system . The standard cost card for the product is as follows:

Particulars `

Direct Material 0.5 kg. At ` 4 per kg. 2.00

Direct wages 2 hours at ` 2 per hour 4.00

Variable overheads 2 hours at ` 0.30 P.H. 0.60

Fixed overheads 2 hours at ` 3.70 P.H. 7.40

Standard Cost 14.00

Standard Profi t 6.00

Standard selling Price 20.00

Selling and administration expenses are not included in the standard cost, and are deducted from profi t as a period cost. Budgeted output for April 1987 was 5,100 units, Actual results for April 1987 were as follows:



Production of 4,850 units was sold for ` 95,600 Material consumed in production amounted to 2,300 kg. At a total cost of ` 9,800 Labour hours paid for amounted to 8,500 hours at a cost of ` 16,800. Actual operating hours amounted to 8,000 hours. Variable overheads amounted to ` 2,600 Fixed overheads amounted to ` 42,300. Selling and administration expenses amounted to ` 18,000.

Required: (a) Calculate all variances.(b) Prepare an operating statement for the month ended 30th April 1987.

Solution: (a) Calculation of Variances:(i) Material Price Variance = Actual quantity (std. rate – Actual rate) = ` 9,200 – ` 9,800 = ` 600(A)(ii) Material Usage Variance = Std. rate (Std. quantity – Actual quantity)] = ` 4(2,425 kg. – 2,300kg.) = ` 500(F)(iii) Labour Rate Variance = Actual hours (Std. rate – Actual rate) = ` 17,000 – ` 16,800 + ` 200(F) (iv) Labour Effi ciency Variance = Std. rate (Std. hours – Actual hours) = ` 2 (9,700 – 8,000) = ` 3,400(F)(v) Labour Idle Time Variance = Std. rate × idle time = ` 2 × 500 hrs = ` 1,000 (A)(vi) Variable Overhead Expenditure variance = (Budgeted variable overheads – Actual variance Overheads) = (8,000 hrs × ` 0.30) – ` 2,600 = ` 200 (A)(vii) Variable Overhead Effi ciency variance = Std. rate (Std. hours –Actual hours) = ` 0.30 (9,700 – 8,000) = ` 510(F)(viii) Fixed Overhead Expenditure variance = (Budgeted fi xed overheads – Actual fi xed overheads) = (5,100 units × ` 7.40) – ` 42,300 = ` 4,560 (A)(ix) Fixed Overheads Volume variance = Budgeted fi xed overheads per hour (Budgeted volume – Actual volume) = ` 7,40 (6,100 units - 4,850 units) = ` 1,850 (A)(X) Fixed overheads effi ciency variance = Budgeted fi xed overheads per hour (Std. hrs –Actual hours) = ` 3.70(9,700 hrs. – 8,000 hrs.) = ` 6,290 (F)(xi) Fixed overheads capacity variance: = Budgeted fi xed overheads per hour (Budgeted capacity – Actual capacity) = ` 3.70 (5,100 × 2) – 8,000) = ` 8,140 (A)



(xii) Sales Price Variance = Actual qty. (Budgeted rate – Actual rate) = ` 97,000 – ` 95,600 = ` 1,400 (A)(xiii) Sales volume variance = Std. profi t per unit (Budgeted sales volume – Actual Sales Volume) = ` 6 (5,100 – 4,850) = ` 1,500 (A)(b) Operating Statement for the mo nth ended 30th April 1997:

Budgeted profi t before selling & administration expenses

Amount` `

(5,100 units × ` 6) 30,600Sales Variances:Price 1,400(A)Volume 1,500 (A) 2,900(A)Actual sales minus standard cost of sales 27,700Cost Variances: (F) (A)

` `

Material price — 600Material usage 500 —Labour rate 200 —Labour effi ciency 3,400 —Labour idle time — 1,000Variable overheads expenditure — 200Variable overheads effi ciency 510 —Fixed overheads expenditure — 4,560Fixed overheads effi ciency 6,290 —Fixed overheads capacity — 8,140

10,900 14,500 3,600 (A)Actual profi t before selling& administration expenses 24,100Less: Selling & administration expenses 18,000Actual profi t for the month 6,100Note:A = Adverse F= FavourableCheck(not required):

` `

Sales 95,600Less: Cost of materials 9,800Labour 16,800Varaible overheads 2,600Fixed overheads 43,300Selling & Admn.expenses 18,000 89,500Net Profi t 6,100

Question 54: 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 fi rm. The standard cost per unit of output of department B is:



Particulars $ $

Direct labour (14 hours at ` 2 per hour) 28Direct materials:1. Output of department A ( 3 kg at ` 9 per kg) 272. Acquired by and directly input to department B material × (4 kg at ` 5 per kg.) 20 47Variable overhead (at ` 1 per direct labour hour worked) 14Fixed production overheads:1. Directly incurred by department B (note1) manufacturing overhead (per unit) 32. Allocated to department B general factory overhead (per unit) 8 11Standard cost per unit ` 100

In the fi rst month of operation of the pilot study (month 7 of the fi nancial 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 fi rst month of operation were:

Particulars ` `

Direct labour (6500 hours) 14,000Direct materials:1. Output of Department 21,000A (1400 Kg) (Note 2)II Material X (1900 Kg.) 11,500 32,500Variable overheads 8,000Fixed overheads1. Directly incurred manufacturing overhead 1,6002. Allocated to department B (Note 3) 2,900 4,500

$59,000

Note 1: Based on normal monthly production of 400 unitsNote 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 ineffi ciency 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 ineffi cient 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.

Solution: Data for Resource Variance

Material Standard ActualQty. Rate Amount Qty. Rate Amount

Output of A 1,500 9 13,500 1,400 15 21,000X Material 2,000 5 40,000 1,900 6.05 11,500Labour Hr. 7,000 2 14,000 6,500 2.15 14,000Variable – OH 7,000 1 7,000 6,500 1.23 8,000

44,500 54,500



Data for Fixed – Overhead VariancesBudgeted Hour Recovery Rate Budgeted overhead

14 Hr × 400 = 5,600 4,400/5,600 4,400 (11 × 400)Actual WH is Actual

6500 4,500Standard Hour Recovered

7000 (14 Hr x 500) 4,400/5,600 x 7,000 = 5,500

(a) Statement of performanceAmount ($)

Standard Cost 50,000Controllable Variances Material Usage Variance (S.Q. – A.Q.) × A.R.

A → (1,500 – 1,400) × 9 = 900 FB → (2,000 – 1,900) × 5 = 500 F 1,400 F

Labour Effi ciency Variance(S. Hr – A.W.Hr) × S.R.(7,000 – 6,500) × 2

1,000 F

Fixed Overhead Variances(S.Hr – A.Hr) × S.R.(7,000 – 6,500) × 0.78

329 F

Variable – OH Effi ciency Variance(S.Hr – A.Q.Hr) × S.R. = (7,000 – 6,500) × 1

500 F

Uncontrollable Variances: Material Prices Variances (S.R. – A.R.) × A.Q.Output of A → (9 – 15) × 1,400 = 7,000 AMaterial X → (5 – 6.05) × 1,900 = 2,000 A

9,000 A

Labour Rate Variance (2 – 2.15) × 6,500Variable OH Expenses Variance (1 – 1.23) × 6,500Fixed – OH Exp. Variance (4,400 – 4,500)Fixed – OH Capacity Variance (6,500 – 5,600) × 0.7857

975 A1,495 A

100 A707 F

Actual Cost → 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 55: ABC Ltd produces jams and other products. The production pattern for all the products is similar fi rst 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 fi rm operates system of standard costing for each batch of jam. The standard cost data for a batch of jam are:Fruit extract 400 kg @ ` 1 per kgGlucose syrup 700 kg @ ` 2 per kgPectin 99 kg @ ` 1 per kgCitric acid 1 kg @ ` 5 per kgLabor 18 hrs. @ ` 2 per hourStandard 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 428 kg @ ` 4 per kgGlucose syrup 742 kg @ ` 5 per kgPectin 125 kg @ ` 2 per kgCitric acid 1 kg @ ` 6 per kgLabour 20 hr @ ` 4 per hourActual 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.

Solution: Data for Resource Variances

MaterialOriginal Standard Revised Standard Actual

Qty. Rate Amount Qty. Rate Amount Qty. Rate AmountFruit Extract 400 1 400 400 2 800 428 4 1,712Glucose Syrup 700 2 1,400 700 24 1,680 742 5 3,710Pectin 99 1 99 99 1 99 125 2 250Citric Acid 1 5 5 1 5 5 1 6 6

1,200 1,904 1,200 2,584 1296 5,678Labour 18 2 36 18 2 36 20 4 80

1,940 2,620 5,758

(a) Statement of Uncontrollable Planning VariancesIngredients Traditional Variance

(Original – Actual)Planning Variances

(Original Standard – Revi. Stan.)Operating Variances

(Revised Stand – Actual)Price VarianceFruit Extract (D.M.) 400 – 1,712 = 1,312 A 400 – 800 = 400 A 800 – 1,712 = 912 AGlucose Syrup 1,400 – 3,710 = 2,310 A 1,400 – 1,680 = 280 A 1,680 – 3,710 = 2,030 APecting 99 – 250 = 151 A 99 – 99 = NIL 99 – 250 = 151 ACitric Acid 5 – 6 = 1 A 5 – 5 = NIL 5 – 6 = 1ALabour Variance 35 – 80 = 44 A 36 – 36 = NIL 36 – 80 = 44 A

Question 56: 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: (`) (`)Selling price per unit 200Less: 4 kg materials @ ` 20 per kg 80 6 hours labour @ ` 7 per hour 42 122Contribution per unit 78 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 diffi cult to work with.The price of the alternative was expected to be ` 16.50 per kg. In the event, actual usage was 12450 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 diffi culties 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;

Solution: Data for Resource Variances

Material Original Standard Revised Standard ActualQty. Rate Amount (`) Qty. Rate Amount (`) Qty. Rate Amount (`)

Material(kg)

2,850 × 4 = 11,400 20 2,28,000 12,825 (2,850 × 4.5)

16.5 2,11,612.50 12,450 18 2,24,100

Labour(hrs.)

6 × 2,850 = 17,100 7 1,19,700 17,100 6.5 1,11,150 18,800 8 1,50,400

3,74,500

(a) Statement of Reconciliation (Planning and Operating Variances)Amount (`)

Budgeted Contribution (2,500 × 78) 1,95,000

Sales Variances Sales Margin PriceSales Margin volume (2,500 – 2,850) × 78

—27,300 F

Cost Volume Variance Total Planning Variance (b)Total Operating Variance (b)

24,937.5 F51,737.5 A

Actual Contribution (2,850 × 200 – 3,75,500) 1,95,500

(b) Statement of Variances

ParticularsTraditional Variance

(Original – Actual Standard)

Planning Variances(Original Standard – Revised Standard)

Operating Variances(Revised Stand – Actual)

1. Material Cost Variance 2,28,000 – 2,24,100 = 3900 F

2,28,000 – 2,11,612.5 = 16,387.5 F

2,11,612.5 – 2,24,100 = 12,487.5 A

2. Material Price Variance (20 – 18) × 12,450 = 24,900 F

(20 – 16.5) × 12,825 = 44,887.5 F

(16.5 – 18) × 12,450 = 18,675 A

3. Material Usage Variance (11,400 – 12450) × 20 = 21,000 A

(11,400 – 12,825) × 20 = 28,500 A

(12,825 – 12,450) × 16.5 = 6,187.5

4. Labour Cost Variance 1,19,700 – 1,50,400 = 30,700 A

1,19,700 – 1,11,150 = 8,550 F

1,11,150 – 1,50,400 = 39,250 A

5. Labour Rate Variance (7 – 8) × 18,800 = 18,800 A

(7 – 6.5) × 17,100 = 8,550 F

(6.5 – 8) × 18,800 = 28,200 A

6. Labour Effi ciency Variances (17,100 – 18,800) × 7 = 1,1900 A

(17,100 – 17,100) × 7 = NIL

(17,100 – 18,800) × 6.5 = 11,050 A

Total Variances 26,800 A 24,937.5 F 51,737.5 A

Question 57 (Growth, price-recovery, and productivity components): Oceano T-shirt company sells a variety of T-shirts. Oceano presents the following data for its fi rst two years of operations, 2003 and 2004. 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.



2003 2004Number of T-shirts purchased 20,000 30,000Number of T-shirts lost 400 300Number of T-shirts sold 19,600 29,700Average selling price `15 `14

Average cost per T-shirt `10 `9Administrative capacity in terms of number of customers that can be served 40,000 36,000Administrative costs `80,000 `68,400Administrative cost per customer `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 2004.

Solution:Balance Score Card

Last Year Profi t (2003) Growth Price Productivity Current Year Profi t (2004)

Revenue → 2,94,000 A. (B.Q. – A.Q.) × B.S.P. C. 29,700 A — 4,15,800less : CostMaterial → 2,00,000 B. 1,03,060.4 A D. 30,000 F. F. 3,061 F 2,70,000Others → 80,000 E. 11,600 F. 68,400Profi t → 14,000 48,440 F 11,900 F 3,061 F 77,400

A. Revenue effect of Growth = (B.Q. – A.Q.) × B.S.P. = (19,600 – 29,700) × 15 = 1,51,500 Fav.B. Cost Effect of Growth = (B.Q. – A.Q.) × B.V.C. = (19,600 – 29,700) × 10,204 = 1,03,060.4 AC. Revenue effect of price = (B.S.P. – A.S.P.) × A.Q. = (15 – 14) × 29,700 = 29,700 A.D. Cost effect of priceM.P.V. = (S.R. – A.R.) × A.Q. = (10 – 9) × 30,000 = 30,000 FE. Cost effect of Price (Fixed) = fi xed overhead expense variance = Budget – Actual = 80,000 – 68,400 = 11,600 F.F. Productivity (Material Usage Variance) = (30,306.20 – 30,000) × 10 = 3061 F.




Budget Standard ActualQty. Rate Amount Qty. Rate Amount Qty. Rate Amount

Material 20,000 10 2,00,000 30,306.12 10 3,03,061 30,000 9 2,70.000

Working Note 2

Material cost per unit of fi nished goods = 2,00,000

________ 19,600 = 10.204

Question 58 (Strategy, balanced scorecard service company): Snyder corporation is a small information systems consulting fi rm that specializes in helping companies implement sales management software. The market for Snyder’s products is very competitive .To compete, Snyder must deliver quality service at a low cost Snyder bills clients in terms of units of work preformed. Which depends on the size and complexity of the sales management system. Snyder presents the following data for 2002 and 2003.

Particulars 2002 20031. Units of work performed 60 702. Selling price ` 50,000 ` 48,0003. Software implementation labor-hours 30,000 32,0004. Cost per software implementation labour-hour ` 60 ` 635. Software implementation support capacity (in units work) 90 906. Total cost of software implementation support ` 3,60,000 ` 3,69,0007. Software implementation support capacity cost per unit of work ` 4,000 ` 4,1008. Number of employees doing software development 3 39. Total software development costs ` 3,75,000 ` 3,90,00010. Software development cost per employee ` 1,25,000 ` 1,30,000

Software implementation labour-hour costs are variable costs. Software implementation support costs for each year depend on the software implementation support capacity(defi ned in terms of units of work) that Snyder chooses to maintain each year. It does not vary with actual units of work performed that year. At the start of each year management uses its discretion to determine the number of software development employees. The software development staff and costs have no direct relationship with the number of units of work performed. 1. Is Snyder corporation’s strategy one of product differentiation or cost leadership? Explain briefl y. 2. Describe key elements you would include in Snyder’s balanced scorecard and your reasons for doing so.

Question 59: Following a strategy of product differentiation, Westwood corporation makes a high-end kitchen range hood, KE8. Here’s Westwood’s data for 2002 and 2003.

2002 20031. units of KE8 produced and sold 40,000 42,0002. Selling price `100 `1103. Direct materials (square feet) 1,20,000 1,23,0004. Direct material costs per square foot ` 10 ` 115. Manufacturing capacity for KE8 50,000 units 50,000 units6. Conversion costs ` 10,00,000 ` 11,00,0007. Conversion costs per unit of capacity (Row 6 – Row 5)

` 20 ` 22

8. Selling and customer-service capacity 30 customers 29 customers9. Selling and customer- service costs ` 7,20,000 ` 7,25,00010. Cost per customer of selling and customer service capacity (Row 9-Row 8)

` 24,000 ` 25,000



Westwood produced no defective units and reduce direct material usage per unit of KE8 in 2003. 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 in 2002 and 25 customers in 2003.

Required: 1. Calculate the growth price-recovery and productivity components that explain the change in operating income

from 2002 to 2003. 2. Suppose during 2003 the market for high-end kitchen range hoods grew at 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 2002 to 2003 is due to the industry-market size factor cost leadership and product differentiation.

Solution: 1. Balance Score Card

Year 2002 (` in lakhs) Growth (`) Price (`) Productivity Year 2003 (` in lakhs) (19 kg)Revenue → 40 A. 2,00,000 F C. 4,20,000 FCost → F. 30,000 F Cost:Material → 12 D. 1,23,000 A Material → 13.53Conversion → 10 B. 60,000 A Conversion → 11Selling and distribution → 7.20 E. 1,05,000 A. Selling & Distribution → 7.25

Profi t → 10.80 1,40,000 F 1,92,000 F 30,000 F 14.42

A. Revenue effect of Growth = (B.Q. – A.Q.) × B.S.P. = (40,000 – 42,000) × 100 = 2,00,000 F.B. Cost effect on Growth = (B.Q. – A.Q.) × B.V.C. = (40,000 – 42,000) × 30 = 60,000 A.C. Revenue effect of price = (B.S.P. – A.S.P.) × A.Q. = (100 – 110) × 42,000 = 4,20,000 F.D. Cost effect of price = (S.R. – A.R.) × A.Q. = (10 – 11) × 1,23,000 = 1,23,000 AE. Cost effect of price (fi xed – OH exp. variance) = Budgeted – Actual + Selling and Distribution = (10,00,000 – 11,00,000) + (7,20,000 – 7,25,000) = 1,00,000 A + 5,000 A = 1,05,000 A.F. Productivity (Material Usage Variance) = (S.Q. – A.Q.) × S.R. = (1,26,000 – 1,23,000) × 10 = 30,000 F.



2. Statement of change in income

A. Market Size 84,000 FB. Product Difference Policy

Market Share 56,000 FPrice 1,92,000 F

C. Cost Productivity 30,000 FChange in Income 3,62,000 F


Budget Standard ActualQty. Rate Amount Qty. Rate Amount Qty. Rate Amount

Material 1,20,000 10 12,00,000 1,26,000 10 1,26,000 1,23,000 11 13,53,000

Question 60: A company manufacturers a product whose data for a period has been analysed as follows:Standard Cost `

Direct materials-5 units at @ 3 15Direct labour 5 hr @ 5 per hour. 25Production overheads-5 hours at @ 4 20Total 60

Profi t margin is at 25% on sale price. Budgeted sales for the period is ` 39,200.Actual DataSales ` 35,000Direct materials ` 8,000

Direct wages ` 12,000

Analysis of variancesAdverse (`) Favorable (`)

Direct materialPrice 800 —Usage — 405Direct LabourRate — 975Effi ciency 300 —Production overheadExpenditure 200 —Volume — 340

Assume that there is no change in stock and that there are no other overheads.

Required: Compute the following from the above details: 1. Actual production 2. Actual profi t 3. Actual hours worked 4. Budgeted hours worked 5. Production overhead effi ciency variance 6. Production overhead capacity variance 7. Sales price variance 8. Sales volume profi t variance 9. Reconciliation between actual profi t and budgeted profi t.



Working Note 1Budgeted cost & Profi t Material 15 Wages 25 Factory O/H 60 Profi t 20 Selling price 80 Budget sales 39200 Budgeted Qty 490 Working Note 2 Material cost variance = M.P.V. + M.U.V. SC – AC = 800 + (–405) SC = –395 + 8000Working Note 3 Standard cost = Budgeted cost × Actual output Actual output = Working Note 4 Labour eff. variance = (5 hrs – A.W. hrs)SR –300 = (5 hrs × 507 – A.W. hrs)5 AW hrs = 2595Working Note 5Production O/H expenditure variance = Budget – Actual –200 = (` 20 × 490) – Actual Actual = ` 10,000(ii) Statement of Actual profi t Actual sales 35,000USS: Material 8,000 Labour 12,000 Variance O/H – Fixed O/H 10,000 Actual Profi t 5,000Working Note 6 Budgeted hrs = 5 hrs × 490 B hrs (5 × 490) A hrs ` 2,595 5 hrs (5 × 507)Prodn overhead effi ciency variance = (5 hrs – A.W. hrs) Rate = (5 × 507 – 2,595) = 240 AFixed overhead capacity variance = (A hrs – B hrs) Rate pu = (2595 – 2450)4 = 580Sales margin price variance = (BSP – ASP)AQ = = 5560 FSales margin volume variance = (BQ – AQ) B pr pu = (490 – 507)20 = 340 A



Question 61: The standard cost sheet of a company based on the normal output of 30,000 units for a quarter is as under:

`

Direct Materials 4 kg @ ` 2 per kg 8.00Direct Wages 6 Hours @ ` 4 per hour 24.00Overheads 50% of Direct Wages 12.00Total Costs 44.00

Profi t 6.00Selling Price 50.00

The budgeted fi xed overheads amount to ` 1, 44,000 per quarter and it is included in the overhead cost given above. On the basis of the budgeted activity of 36,000 units, the company estimated the profi t for the second quarter of the year as under:

Particulars `

Direct Material 2,88,000Direct Wages 8,64,000

Overheads(50% of Wages) 4,32,000Total Costs 15,84,000

Sales 18,00,000Profi t 2,16,000

The cost records revealed the following actual data for the second quarter of the year: Production 25,000 units Direct materials consumed 96,000 kg at ` 2.25 per kg Direct wages paid, 1,60,000 hours at ` 4.10 per hour. Out of which 6,000 hours being idle time were not recorded on production. Overheads ` 3,32,000 out of which ` 1,50,000 were fi xed. Sales 25,000 units at an average price of ` 51.50 per unit.

Required: (i) Prepare a statement of actual Profi t/Loss for the second quarter of the year. (ii) Analyze the variance and present an operating statement reconciling the budgeted profi t with actual profi t.

Solution: STATEMENT OF ACTUAL PROFIT (LOSS)

(For the second quarter of the year)`

1: Sales Revenue: 25,000 units × ` 51.50 12,87,500Direct Material 96,000 hours × ` 225 2,16,000Direct wages 1,60,000 hrs × ` 4.10 6,56,000Overheads 3,32,0002: Total cost 12,04,0003: Profi t (Loss) (1) – (2) 83,500

OPERATING STATEMENT(Reconciling the budgeted Profi t with Actual Profi t)

Particulars Notes WorkingFavourable

`

Variableadverse

`

Actual`

Budgeted Profi t (36,000 × 6) — — — 2,16,000Sales variance 1(a) — —Sales volume margin variance 1© — 66,000 —Sales price variance 1(b) 37,500 —- —-



Net variance 32,5003. Profi t before adjustment ofcost variance (1)–( 2) 1,87,500MaterialPrice usage 2(i) (a) 8,000 24,000 —2. Lobour rate 2(i) (b) — —Effi ciency idle time —

2(ii) (b) — 16,000 —21(ii) (c) 16,000 —2(ii) (d) 24,000 —

Variable overhead expenditure 3 (iii) 2,800 — —Effi ciency 3(iv) — 4,800 —Fixed overheadExpenditure 3(vi) — 6,000 —Effi ciency 3(vii) — 3,200 —Capacity 3(viii) — 20,800 —

10,800 1,14,800 1,04,000Actual profi t (2)–(3) 83,500

Working Note1: Sales Variance Based on Profi t (a) Sales Value variance

a. Statement of Actual Profi t (Loss)(For the second quarter of the year)

`

1. Sales Revenue: 25,000 units × ` 51.50 12,87,500 Direct material 96,000 hrs × ` 2.25 2,16,000 Direct wages 1,60,000 hrs× 6,56,000Overheads 3,32,0002. Total cost 12,04,0003. Profi t (loss) (1)–(2) 83,500

Operating statement(Reconciling the budgeted profi t with actual profi t)

Working Variablenotes

Favourable`

Adverse`

Actual`

1: Budgeted Profi t (36,000 × 6) — — 2,16,002: Sales variances 1(a) — — —(i) Sales Volume margin Variance 1(c) — 66,000 —(ii) Sales price variance 1(b) 37,500 — —(iii) Net variance 32,5003. Profi t before adjustmentof cost variances (1) – (2) 1,87,500MaterialPrice 2 (1) (a) — 24,000 —Usage 2 (1) (b) 8,000 — —LabourRate 2 (ii) (b) — 16,000 —



Effi ciency 2 1(ii) I — 16,000 —Idle time 2 (ii) (d) — 24000 —Variable overhead expenditure 3(iii) 2,800 — —Effi ciency 3 (iv) — 4,800 —Fixed overheadExpenditure 3 (vi) — 6,000 —Effi ciency 3 (vii) — 3,200 —Capacity 3 (viii) — 20,800 —-

10,800 1,14,800 1,04,000Actual profi t (2)–(3) 83,500

Working Note1: Sales Variances Based on Profi t:(a) Sales Value Variances = Budgeted Profi t – Actual Profi t = 2,16,000 – 83,500 = ` 1,32,500 (Adverse)(b) Sales Price Variance = Actual Qty. Sold × (Std. Price – Actual Price)

Question 62: The following are budgeted fi gures for a department in a business for a normal 5-day week of 40 hours

Particulars `

Direct materials 40,000Direct wages 10,000

Variable overheads 15,000Fixed overheads 20,000

The standard direct wage rate is ` 2.50 per hour and the budgeted production is 5,000 units sold at ` 20 per unit. Wages are paid at hourly rate, and variable overheads are absorbed at the rate of 150% of direct wages. During a particular week, 4 days are worked instead of 5 days owing to fall in demand for the product, but the productivity of direct labour increased by 10%. Present a profi t statement in respect of this week and reconcile the budget profi t with actual profi t for the week.

Solution:

Statement of profi tParticulars Budget ActualQuantity (units) 5,000 4,400Sales (`) 1,00,000 83,000

(5,000 × 20) (4,400 × 20)Uss-Material 40,000 35,200Labour 10,000 8,000Variable O/H 15,000 13,200Fixed O/H 20,000 20,000Profi t 15,000 11,600

Statement of reconciliation (Marginal) Budgeted profi t 15,000 Sales margin price variance 4 Sales margin volume variance (BQ – AQ) B con pu (5,000 – 4,400) 7



Labour effi ciency variance (5 hrs – A hrs) SR 8 (3,520 – 3,200) 2.5Variable O/H effi ciency variance (3,520 – 3,200) 3.75Fixed O/H expenditure varianceActual profi t.

Question 63: S Ltd. operates a system of standard costing in respect of one of its products, which is manufactured within a single cost center. The following information is available: For one unit of product the standard materials input is 20 liters at a standard price of ` 2 per litre. The standard wage rate is ` 6 per hour and 5 hours are allowed in which to produce one unit. Fixed production overhead is absorbed at the rate of 100% of direct wages cost. During the month just ended the following occurred:Actual price paid for material purchased ` 1.95 per litreTotal direct wages cost was ` 1,56,000Fixed production overhead incurred was ` 1,58,000

Variances Favourable (`) Adverse (`) Direct material price (at the time of purchase) 8,000 —

Direct material usage — 5,000

Direct labour rate — 5,760

Direct labour effi ciency 2,760 — Fixed production overhead expenditure — 8,000

Required: Calculate the following for the month:Budgeted output in units,Number of liters purchased,Number of liters used above standard allowed,Actual units produced,Actual hours worked,

Average actual wage rate per hour.Solution: (a) direct material price variance = (SP - AP) AQ 8000 = (2 – 1.95) AQ AQ = 160000 litre - point i(b) direct material usage variance – (SQ – AQ) SP -5000 = (SQ – 160000)2 SQ = 157500(c) Excess duty = AQ – SQ = 2500 litre - point (iii)(d) Direct labour rate variance = (SR – AR) A Hrs -5760 = SR × A Hrs – AR × A Hrs - 5760 = 6 (A Hrs) – 156000 A Hrs = 25040 - point (v)

(e) Average actual wage rate per hour = Actual wages

___________ Actual hrs

= 1,56,000/25,040 = ` 6.23 - point (vi)



(f) Budgeted output = Budgeted O/H / Budgeted O/H per unit = 1,50,000/6 x 5 = 5,000 units - point (vii)(g) Actual output = Recovered O/H / Recovery rate = 100% x direct wage cost / 30 = 1,56,000/ 30 = 5,200 units.

Question 64: 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:Direct Material (3 kg At ` 5 per kg) ` 15.00Direct Labour (0.5 hour at ` 20 per hour) 10.00Manufacturing Overhead (75% of direct labour cost) 7.50Total Cost 32.50 The following data was obtained from Zed Company’s record for April 1998:

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 effi ciency 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 1998. There was no opening stock of raw materials on 1st April, 1998.

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 (C.A. Final May 1998)

Solution:(i) Standad direct labour hours allowed for the actural output achieved. Actual number of units produced × Standard direct labour hours P.U. 4000 Units × 0.5 hrs. = 2000 hrs.(ii) Actual direct labour hours worked Direct Labour effi ciency variance = Standard rate per hour (Standard hrs. hor actual output – Actual direct Labour hours worked)

` 2,000(F) = ` 20 (2000 hrs. - x)` 2,000(F) = ` 40,000 – 20x

20x = 38,000 x = 38,000/20 = 1,900 Actual direct labour hours worked = 1,900 hrs.



(iii) Actual Direct labour rate Direct labour rate variance = Actual hours (Standard rate per labour hour – Actual direct labour rate per hour) ` 1,900 (A) = 1,900 hrs. (` 20 - x) ` 1,900 = 38,000 – 1,900x 1,900x = 39,900 x = 39,900/1,900 = 21 Actual direct labour rate per hour = ` 21(iv) Standard Quantity of direct materials (in Kgs.) Actual number of units produced × Std. quantity of direct material required P.U. (in kgs.) = 4,000 Units × 3 kgs. P.U. = 12,000 kgs(v) Actual quantity of direct materials used (in Kgs) Direct material usage variance Std. price per kg of D material (Std. Qty. of Direct material for actual output – Actual Qty. of direct materials

used for actual output) ` 2,500 (A) = ` 5{(4000 units × 3 kgs) – x} 2,500 = 60,000 – 5x 5x = 62,500 x = 62,500/5 = 12,500 Actual Qty. of direct materials used for actual output = 12,500 kgs(vi) Actual quantity of direct materials purchased (in kgs) Direct Material Price Variance Actual Qty. of direct materials purchased (Std. price per kg – Actual price per kg) ` 32,500(A) = (Actual Qty. of direct materials purchased × ` 5) – (Actual Qty. of direct materials Actual price

per kg.) = ` 5 × Actual Qty. of direct materials purchased – ` 68,250 ` 68,250 – ` 3,250 = (` 5 × Actual Qty. of direct materials purchased) ` 5 × Actual Qty. of direct materials purchased = ` 65,000 Actual Qty. of direct materials purchased = 13000 kgs(vii) Actual Direct materials price per kg ` 3,250 (A) = 13,000 kgs (` 5 – Actual direct materials price per kg) ` 65,000 + ` 3,250 = 13000 kgs × Actual Direct materials price per kg. 13,000 kgs × Actual direct materials price per kg = 68,250 Actual direct materials price per kg = ` 5.25

Question 65: The following information is available from the record of Sunrise Ltd. which produces only one product.

Budgeted Income Statement: January 2004` ` `

Sales Revenue 1,00,000(20,000 units at ` 5)

Production Costs:

Budgeted production 20,000 units



Direct Materials:A (10,000 Kg. @ Re. 0.30) 3,000B (10,000 Kg. @ Re. 0.70) 7,000

10,000Direct Labour

Skilled (9,000 Hrs. @ ` 3.00) 27,000Un-skilled (5,200 Hrs. @ ` 2.50) 13,000

40,000Production Overhead:

Fixed 20,000Variable (20,000 units @ Re. 0.50) 10,000

80,000Add: Opening Stock (1,000 units @ ` 4.00) 4,000

84,000Deduct Closing Stock (1,000 units @ ` 4.00)

4,000

Budgeted Profi t 20,000

During January 2004 production and sales were both above budget and the following income statement was prepared:

Income Statement January 2004Particulars ` ` `

Sales Revenue:(14,000 units at ` 5) 70,000(8,000 units at ` 4.75) 38,000

1,08,000Production Costs:

Actual production 24,000 units

Direct Materials:A (16,000 Kg @ ` 0.20) 3,200B (10,000 Kg. @ ` 0.80) 8,000

11,200Direct Labour:

Skilled (13,000 Hrs. @ ` 2.95) 38,350Un-skilled (6,300 Hrs.@ ` 2.60) 16,380

54,730Overhead Costs:

Fixed 18,020Variable (24,000 units @ ` 0.625) 15,000

98,959Add: Opening Stock (1,000 units @ ` 4)

4,000

1,02,950



Less: Closing Stock(3,000 units @ ` 4)

12,000

Cost of Goods Sold 90,950Actual Profi t 17,050

During the period 1,000 abnormal idle hours for skilled labour due to machine breakdown, was reported. In the above statement stock is valued at standard cost of ` 4 per unit.

Required: Prepare a standard costing statement analysing the differences between the budget and the actual performance. In your analysis include calculations of the sales volume and sales price variances; direct material price, mix yield and usage variances’ direct labour rate, idle time and effi ciency variances; overhead expenditure and volume variances. (C.A Final May 1995)

Working Notes:I. Sales Variance (1) Sales Volume Margin Variance (Actual Sales Volume: Budgeted Volume) × Standard Margin = (22,000 units - 20,000 units) × Re. 1 = ` 2,000 (F) (2) Sales Margin Price Variance Actual Sales Volume × (Actual Selling Price – Budgeted Selling Price) = [14,000 units (` 5 ` 5] + [8,000 units × (` 4.75 – ` 5)] = ` 2,000 (A)II. Material Variances (1) Material Price Variance (Standard price-Actual Price) × Actual quantity A : (0.30 × 0.20) × 16,000 kg. = ` 1,600 (F) B : (0.70 – 0.80) × 10,000 kg. = ` 1,000 (A) = ` 600 (F) (2) Material Mix Variance Total Actual Quantity (S.C. of Std. mix per kg. S.C. of actual mix per kg.)

= 26,000 kg. [ ` 10,000 _________ 20,000 kg. –

` 11,800 _________ 26,000 kg. ] = ` 1,200 (F)

(3) Material Yield Variance Std, rate per kg. of output (Actual Yield-Std. Yield) = 0.50 (24,000 kg. – 26,000 kg.) = ` 1,000 (A)III. Labour Variance (1) Labour Rate Variance (Std. rate p.h. – Actual rate p.h.) × Actual hours Skilled Labour : (` 3 – ` 2.95) × 13,000 hrs. = ` 650 (F) Unskilled Labour : (` 2..50 – ` 2.60) × 6,300 hrs. = ` 630 (A) = ` 20 (F) (2) Labour Effi ciency Variance (Std. hrs. four Actual output – Actual hours) × Std. rate p.h. Skilled Labour : (10,800 hrs. – 12,000 hrs.) × `3 = ` 3,600 (A) Un-skilled Labour : (6,240 hrs – 6.300 hrs.) × ` 2.50 = ` 150 (A) = `3,750 (A) (3) Idle Time Variance (Idle hours × Standard Wage rate p.h.) = ` 3,000(A) Skilled Labour: 1,000 hours × ` 3



IV. Variable Overhead Variance (1) Variable Overhead Expenditure Variance (Variable Overhead recovered on actual output – Actual Variable Overhead) = (24,000 units × ` 0.50) – ` 15,000 = ` 3,000 (A)V. Fixed Overhead Variances (1) Fixe Overhead Expenditure Variance (Budgeted Expenditure – Actual Expenditure) = (` 20,000 – ` 18,020) = ` 1,980 (F) (2) Fixed Overhead Volume Variance (Budgeted Volume – Actual Volume) × Std. rate per unit = (20,000 units – 24,000 units) × ` 1 = ` 4,000(F)

Statement reconciling Actual Profi t and Budgeted Profi t Particular Reference of Favorable Variance Adverse Actual

working noteBudgeted Profi t 20,000(as, per Budgeted incomestatement)I. Sales Variances

Sales Vol. Margin VarianceSales Margin Price VarianceProfi t before adjustment of cost variances

12`

2,0002,000

2,000II. Material Variances

PriceMIXYieldUsing varianceLabourRate VarianceEffi ciency VarianceOverheadExpenditure VarianceVolume VarianceActual Profi t

123

16(A)

600(F)

6001,200

600(A)

300(A)

510 (A)

1,0001,400(A)

316(A)

90(F) 1,62613,584

Question 66: The Standard Cost of producing one unit of Item ‘Q’ is an underDirect Material– A – 12 Kg. @ ` 10 120

B – 5 Kg. @ ` 6 30Direct Wages 5 Hrs. @ ` 3 15Fixed Production Overhead 35Total Standard Cost 200Standard Gross Profi t 50Standard Sale Price 250

Fixed Production overhead is absorbed on expected annual output of 13,200 units. External result for the month of September, 2004 are as under: Internal production: 1,000 Units.Sales (1,000 Unit @ ` 250) 2,50,000Direct Material (A – 11,000 Kg.) 1,21,000(B – 5,200 Kg.) 28,600Direct Wages (5,500 Kg.) 17,500Fixed Overhead 39,000

2,06,100Cross Profi t 43,900



You are required to calculate all variances. Material price variance is taken out at the time of receipt of Material Initial purchased were: 12,000 Kg. of ‘A’ @ ` 11 & 5,000 Kg. of ‘B’ @ ` 5.50

(C.A. Final Nov 1997)Statement showing standard and actual costs of material for 1,000 units of

output and standard cost of actual** Standard cost Actual cost × Standard cost of actual input Standard price Qty. Price Amount Qty. Price Amount Actual Standard Amount. Qty. price/Kg. Kg. ` ` Kg. ` ` Kg. ` `

12,000 10 1,20,000 11,000 11 1,21,000 11,000 10 1,10,000 5,000 6 30,000 5,200 550 28,600 5,200 6 31,200 1,50,000 1,49,600 1,41,200

Standard yield (units) = 1,000 units

__________ 17,000 kg × 16,200 kg = 952.94176 units approx.

STANDARD COSTING AND VARIANCE ANALYSIS(2) Statement showing standard and actual labour cost of 1,000 units produced and standard cost of actual hrs.

Hours Rate Amount Hours Rate Amount Hours Rate Amount p.h. p.h. p.h. ̀ ` ` ` ` `

5,000 3 15,000 5,500 3.1818 17,500 5,500 3 17,500

(3) Particulars Budgeted Overhead Finished overhead (`) 38,500 Hours 5,500 Output (units) 1,100

Standard time P.U. (hrs.) 5 Standard fi xed overhead P.U. (`) 35 Standard fi xed overhead rate P.H. (`) 7

(a) Material Variances (1) Material cost variance = Standard cost – Actual cost = ` 1,50,000 – ` 1,49,600 = ` 400(F) (2) Material Price variance = Actual Quantity (Std. Price – Actual Price) = 11,0000 kg (` 10 – ` 11) + 5,200 kg (` 6 – ` 5.50) = ` 11,000 (A) + ` 2,600 (F) = ` 8,400 (A) (3) Material usage variance = Standard price (Standard quantity – Actual quantity) = ` 10 (12,000 kg. – 11,000 kg) + ` 6(5,000 kg – 5,200 kg) = ` 10,000 (F) + ` 1,200 (A) = ` 8,800 (F)



(4) Material mix variance = Total actual quantity (Std. price of Std. Mix per Kg. – Std. Price of actual mix per Kg.)

= 16,200 Kg. [ ` 1,50,000 ________ 17,000 Kg –

` 1,41,200 _________ 16,200 Kg. ] = ` 1741.18 (F)

(5) Material yield variance = Std rate (Actual yield – Std. Yield) = ` 150 (1,000 Units – 952.9412 Units) = ` 7058.82 (F) (6) Material Purchase price variance = Actual quantity of material purchased (Std. price per Kg. – Actual price per Kg.) = 12,000 Kg. (` 10 – ` 11) + 5,000 Kg. (` 6 – ` 5.50) = ` 12,000 (A) + ` 2,500 (F) = ` 9,500 (A)Labour Variances (1) Labour cost variance = (Standard cost – Actual cost) = ` 15,000 – `, 7,500 = ` 7,500(A) (2) Labour rate variance = Actual hrs. (Std. rate – Actual rate) = 5,500 (` 3 – ` 3.1818) = `1,000 (A) (3) Labour effi ciency variance = Std. rate p.h. (Std. hours – Actual hours) = ` 3(5,000 hrs. – 5,500 hrs) = ` 1,,,500 (A)Based Overhead Variance (1) Total fi xed overhead variance = Fixed overhead absorbed – Actual fi xed overhead = (1,000 units × ` 35) – ` 39,000 = ` 35,000 – ` 39,000 = `4,000 (A) (2) Fixed overhead expenditure variance = Budgeted fi xed overhead – Actual fi xed overhead = ` 38,500 – ` 39,000 = ` 500 (A) (3) Fixed overhead volume variance = Std. fi xed overhead rate per unit (Actual output – Budgeted output) = ` 35(1,000 units – 1,100 units) = ` 3,500 (A) (4) Effi ciency variance = Std. fi xed overhead rate per unit (Actual output – Budgeted output) = ` 35(1,000 units – 1,100 units) = ` 3,500 (A)(b) Direct Material Variances

Production 7,500 Std. requirement Op. Stock 600 7,200 units @ 1.5 Kg. = 10,800 kg. + Cl. Stock 300 Introduced 7,200 Std Qty. Actual S.P. Std. Qty. Actual AP Actual Qty. ×SP Qty × SP Qty × AP ` ` ` ` `

10,800 12,000 6 64,800 72,000 6/50 78,000



Usage Variance ` 64,800 – ` 72,000 = ` 7,200 APrice Variance ` 72,000 – ` 78,000 = ` 6,000 ATotal Variance ` 64,800 – ` 78,000 = ` 13,200 A

(c) Direct Labour Variance

Production 7,500

Less: Op. Stock 450 Std. hours produced 7,230 × 4 = 28,920

Add: Cl. Stock 180

7,230

Std. Hours Actual SR Std. Hrs. Actual AR Actual Hours × SR Hrs. × SR Hours × AR ` ` ` ` `

28,920 29,000 6 1,73,520 1,74,000 6/25 1,81,250

Effi ciency Variance (1,73,520 – 1,74,000) = 480 ARate Variance (1,74,000 – 1,81,250) = 7,250 ATotal Variance = 7,730 A

(d) Variable Overheads Variance `

A = Charged to Production 28,920 Effi ciency variance ` 80 A 28,920 × 1 B = Std. Cost of Actual Hours 29,000 Expenditure variance ` 7,000 A 29,000 × 1 C = Actual Overheads 36,000 A – C Total V ` 7,080 A

(e) Fixed Overheads Variance ` A = Charged to Production 28,920 × 3 86,760 B = Std. Cost of Act. Hrs. 29,000 × 3 87,000 C = Budget 96,000 D = Actual 94,000Effi ciency Variance (86,760 – 87,000) = ` 240 (A)Volume Variance (86,760 – 94,000) = ` 9,240 (A)Capacity Variance (87,000 – 96,000) = ` 9,000 (A)Expenditure Variance (96,000 – 94,000) = ` 2,000 (F)Total Variance (86,760 – 94,000) = ` 7,240 (A)

Question 67: The following information has been extracted from the books of a company using standard costing system for November 2004:Direct materials:80 kgs. of materials were consumed. The purchase cost there of is ̀ 49,600. Standard price per kg. of direct material ` 60. The expected output is units per kg. of direct material.



Direct labour:Budget for a 5-day week of 40 hour.Grade A labour 8,000 hours @ ` 5 per hour.Grade B labour 8,000 hours @ ` 4 per hour.

During November 2002, due to shortage of labour, the mix was changed as underGrade A labour 6,000 hours @ ` 5 per hour.Grade B labour 10,000 hours @ ` 4 per hour.

Analysis of working revealed:Grade A labour 6,600 hours @ ` 5.20 per hours.Grade B labour 11,000 hours @ ` 3.90 per hours.where were 21 days in November 2004, out of which one day was holiday leaving 20 working days. In fact the

company actually worked 21 days in November 2004. However, power failure, machine breakdown, etc. resulted in 240 idle hours of Grade A labour.Variable overheads:

Standard cost per unit ` 2.50.Actual overheads ` 15,750 for November 2004.

Fixed overheads.Budget ` 4,40,000 per annum.Budget production 62,500 units per annum.Actual overheads for November 2004 ` 35,000.

Other data:Budgeted weeks 50 in a year.Actual production in November 2004 6,000 units.

Sales:Budget 6,000 units @ ` 60 each.Actual 4,800 units @ ` 62 each.Analysis the variances in as much detail as possible. (I.C.W.A. Final Dec 1998)

Direct Material VariancesOutput = 6,000 unitsStandard quantity = 6,000/8 = 750 kgs.

1. Direct Material Cost Variance (Std. units × Std. price) – (Actual units × Actual price) = (750 × 60) – (800 × 62) = 45,000 – 49,600 = 4,600 (A) 2. Direct Material Price Variance Actual Qty. (Std. price per kg. Actual price per kg.) = 800(60 – 62) = 1,600 (A) 3. Direct Material Usage Variance Std. price per kg. (Std. Qty. Actual Qty.) = 60 (750 – 800) = 3,000 (A) Price Variance + Usage Variance = Cost Variance = ` 1,600 (A) + ` 3,000 (A) = ` 4,600 (A) II. Direct Labour Variances Budgeted no. of days = 50 weeks × 5 days/per week = 250 days Budgeted production = 62,500 units.



Production per day (62,500 units / 250 days) = 250 units Production for 20 days = 250 units × 20 days = 5,000 units Std. Time per unit = 16,000 hrs./5,000 units = 3.2 hrs. Std. hrs. for actual production = 6,000 units × 302 hrs. = 19,200 hrs. Std. Hours

Revised Std. hours

Actual hrs. on job in revised Std. ratio

Actual hrs.

Actual hrs.

1. Direct Labour Cost Variance (Std. hrs × Std. rate) – (Actual hrs. × Actual rate) Grade A = (9,600 hrs. × ` 5) – (6,600 hrs. × ` 5.20) = ` 48,000 – ` 34,320 = ` 13,680 (F) Grade B = (9,600 hrs. × ` 4) – (11,000 hrs. × ` 390) = ` 38,400 – ` 42,900 = ` 4,500 (A) = ` 9,180 (F) 2. Direct Labour Rate Variance Actula time (Std. rate – Actual rate) Grade A = 6,600 (5 – 5.20) = 1,320 (A) Grade B = 11,000 (4 – 3.90) = 1,100 (F) = 220 (A) 3. Direct Labour Effi ciency Variance Std. rate (Std. time for actual output – Actual time) Grade A = 5(7,200 – 6,360) = 4,200 (F) Grade B = 4(12,000 – 11,000) = 4,000 (F) = 8,200 (F)



4. Direct Labour Mix Variance Std. rate (Revised Std. time – Actual time) Grade A = 5(7,200 – 6,510) = 3,450 (F) Grade B = 4(10,850 – 11,000) = 600 (A) = 150 (F) 5. Direct Labour Yield Variance Std. rate (Revised Std. hours – Actual hrs. on Job in revised Std. ratio) Grade A = 5(7,200 – 6,510) = 3,450 (F) Grade B = 4(12,000 – 10,850) = 4,600 (F) = 8,050 (F) 6. Idle Time Variance Std. Rate (Actual hours on Job – Actual hours) Grade A = 5(6,360 – 6,600) = 1,200 (F) Grade B = 4(11,000 – 11,000) = (Nil) = 1,200 (A) 7. Direct Labour Revision Variance Std. rate (Std. hrs. – Revised Std. hrs.) Grade A = 5(9,600 – 7,200) = 12,000 (?F) Grade B = 4(9,600 – 12,000) = 9,600 (A) = 2,400 (F) III. Variable Overhead Variances Std. variable overhead rate per hour = ` 2.50/3.2 hr. = Re. 0.78125 per hr. 1. Variable Overhead Cost Variance (Std. hrs. for actual output × Std. variable overhead rate per hour) – Actual overhead = (19,200 × 0.78125) – 15,750 = 15,000 – 15,750 = 750 (A) 2. Variable Overhead Expenditure Variance (Actual hrs. for actual output × Std. variable overhead rate per hour) – Actual overhead = (17,360 × 0.78125) – 15,750 = 13,563 – 15,750 = 2,187 (F) IV. Fixed Overhead Variances Std. Fixed overhead = 62,500 units × 3.2 hrs. = 2,00,000 hrs. Std. Fixed overhead rate per hour = ` 4,40,000/2,00,000 hrs. = R.s 2.20 per hour Budgeted hours in actual days

= = 16,800 hrs.

1. Fixed Overhead Cost Variance (Std. hrs. for actual production × Std. fi xed overhead rate) – Actual fi xed overheads = (19,200 × 2.20) – 35,000 = 42,240 – 35,000 = 7,240 (F) 2. Fixed Overhead Expenditure Variance Budgeted overheads – Actual overheads = (16,000 × 2.2) – 35,000 = 35,200 – 35,000 = 200 (F) 3. Fixed Overhead Volume Variance Std. rate per hour (Std. hrs. – Budgeted hrs.) 2.20 (19,200 – 16,000) = 7,040 (F)



V. Sales Variances Standard Quantity = 6,000 units. Actual Quality = 4,800 units. Selling price per unit = 60 1. Sales Value Variance (Std Qty. × Std. Selling price) – (Actula Qty. × Actual Selling Price) = (6,000 × 60) – (4,800 × 62) = 3,60,000 – 2,97,600 = 62,400 (A) 2. Sales Price Variance Actual Qty. (Std. selling price – Actual selling price) = 4,800(60 – 62) = 9,600 (F) 3. Sales Volume Variance Std. Selling Price (Std. Qty. – Actual Qty.) = 60(6,000 – 4,800) = 72,000 (A)

Summary of Variances VariancesParticulars Favourable Adverse Total 1. Direct Material (a) Price – 1,600 (b) Usage – 3,000 – 4,600Direct Material Cost Variance 4,600 (A) 2. Direct Labour (a) Rate – 220 (b) Effi ciency – Mix 150 – – Yield 8,050 – – Idle time – 1,200 – Revision 2,400 – 10,600 1,420Direct Labour Cost Variance: 9,180 (F) 3. Variable Overhead (a) Expenditure – 2,187 (b) Effi ciency 1,437 – 1,437 2,187Variable Overhead Cost Variance 750 (A) 4. Fixed Overhead (a) Expenditure 200 – (b) Volume 7,040 – 7,240 – Fixed Overhead Cost Variances 7,240 (F) 5. Sales Variances (a) Price 9,600 – (b) Volume – 72,000 9,600 72,000Sales Value Variance 62,400 (A)



Question 68: The following information is available in respect of Y Ltd. for a week: (a) 400 kg of raw material were actually used in producing product ‘EXE’. The purchase cost thereof being

` 24,800. The standard price per kg of raw material is ` 60. The expected output is 12 units of product ‘EXE’ from each kg of raw material. Raw material price variance and usage variance as computed by cost accountant are ` 800 (adverse) and ` 600 (adverse), respectively.

(b) The week is of 40 hours. The standard time to produce one unit of ‘EXE’ is 30 minutes. The standard wage rate is ` 5 per labour hour. The company employs 60 workers who have been paid hourly wage rate as under:

Number of worker: 6 8 46 Hourly Wage Rate (`): 4.80 5.20 5.00 (c) Budgeted overheads for a four weekly period is ` 81,600. The actual fi xed overheads spent during the said

week are ` 19,800. (d) Entire output of ‘EXE’ has been sold at its standard selling price of ` 15 per unit.

Required: (i) Compute the variances relating to labour and overheads. (ii) Prepare a statement showing total standard costs, standard profi t, and actual profi t for the week. Solution:Working Notes:1. Computation of Standard Quantity and Cost of Raw Material required for actual output. Actual Output of E × E 4,680 units Standard Output per kg. of Raw Material 12 units Standard Quantity of Raw Material required for actual output (4,680 units/ 12 units) 390 kgs Standard Cost of Raw Material (390 Kgs. @ ` 60) ` 23,4002. Tabulation of Data for computation of labour variances.

Standard Labour for actual output Actual Labour for actual output

Standard Time (Hours)

Rate per hour (`)

Amount (`)

Std. Cost for actual hours (`)

Actual Time (Hours)

Rate per hour (`)

Amount

(`)2,340* 5 11,700 12,000 240

3201,840

4.805.205.00

1,1521,6649,200

2,340 11,700 12,000 2,400 12,016

*4,680 units × ½ hrs.3. Tabulation data for computation of fi xed overhead variance.

Particulars Budgeted data Actual dataFixed Overhead (for One Week) (`)Labour hours (60 workers × 40 hrs. per week)Output (Units)Standard Rate per hour (`)Standard Rate per Unit (`)

20,4002,4004,800

8.504.25

(i) Computation of labour and overhead variances1. Labour Cost Variance (Standard Cost of Labour – Actual Cost of Labour) = ` 11,700 – ` 12,016 = ` 3162. Labour Rate Variance Actual hours (Standard Rate – Actual Rate) = ` 12,000 – ` 12,016 = ` 16



3. Labour Effi ciency Variance Standard Rate per hour (Standard hours – Actual hours paid) = ` 11,700 – ` 12,000 = ` 3004. Total fi xed overhead cost variance (Fixed overhead absorbed – Actual Fixed Overhead) = [(4,680 units × `4.25)- ` 19,800] = ` 90 ` 19,800 – ` 19,8005. Fixed Overhead Volume Variance Standard Fixed Overhead per unit (Actual Output – Budgeted Output) = ` 4.25 (4,680 units – 4,800 units) = ` 5106. Fixed Overhead Expenditure Variance (Budgeted Fixed Overhead – Actual Fixed Overhead) = ` 20,400 – ` 19,800 = ` 600

(ii) Statement showing total standard costs, standard profi t and actual profi t for the week.Sales (4,680 units @` 15)Less: Standard Cost Direct Material Direct Labour Overheads (4,680 units @ ` 4.25)

Standard Profi t

23,40011,70019,890

70,200

54,990

15,210Less: Adjustment for Variance Raw Material Price Variance 800(A) Usage Variance 600(A) Labour Rate Variance 16(A)

Effi ciency Variance 300(A) Overhead Expenditure Variance 600(F) Volume Variance 510(A) Actual Profi t

1,400(A)

316(A)

90(F)13,584

BALANCE SCORE CARDBalanced Scorecard is a strategic-based performance management system that typically identifi es objectives and measures for four different perspectives, the fi nancial perspective, the customer perspective, the process perspective, and the learning and growth perspective.

Development



Strategy Translation Process, Vision and StrategyStrategy is defi ned by Kaplan and Norton as: Choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and fi nancial objectives. Strategy translation means specifying objectives, measures, targets, and initiatives for each perspective.



Common Characteristics of Balanced ScorecardsPerformance measures used in the balanced scorecard approach tend to fall into the four groups fi nancial, customer, internal business processes, and learning and growth. Internal business processes are what the company does in an attempt to satisfy customers.

Financial Perspective (i) Establishes long term and short term fi nancial performance objective (ii) Describes the economic consequences of actions taken in other three perspectives.It has three strategic themes: Revenue Growth Cost Reduction Asset UtilizationCustomer Perspective: Increase market share Increase customer retention Increase customer acquisition Increase customer satisfaction Increase customer productivityPerformance value: Decrease price Decrease post purchase functionality Improve product quality Increase delivery reliability Improve product image and reputationProcess Perspective: Increase the no. of new product Increase proprietary products Decrease product development cycle time.



Operations: Increase product quality Increase process effi ciency Decrease process timePost sales service: Increase service quality Increase service effi ciency Decrease service time.Responsibility Accounting Model & Essential Elements 1. Assigning Responsibility 2. Establishing performance measures or Benchmarks 3. Evaluating Performance 4. Assigning Rewards


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