MT EDUCARE PVT LTD CA S.S.

RAJAGOPAL FCA, GRAD CWA

Standard costing – Solutions to Home work problems

Question No: 19 Reconciliation with Finished goods inventory

KPR Limited operates a system of standard costing in respect of one of its products
which is manufactured within a single cost centre. The Standard Cost Card of a
product is as under:

Standard Unit cost

 Direct material 5 kgs @ Rs. 4.20 = Rs 21.00 per unit
 Direct labour 3 hours @ Rs. 3.00 = Rs 9.00 per unit
 Factory overhead Rs. 1.20 per labour hour = 3.60 per unit
 Total manufacturing cost = Rs 33.60 per unit

The production schedule for the month of June, 2007 required completion of 40,000
units. However, 40,960 units were completed during the month without opening and
closing work-in process inventories. Purchases during the month of June, 2007,
2,25,000 kgs of material at the rate of Rs. 4.50 per kg.

Production and Sales records for the month showed the following actual results.
 Material used 2,05,600 kgs.
 Direct labour 1,21,200 hours; cost incurred Rs. 3,87,840
 Total factory overhead cost incurred Rs. 1,00,000
 Sales 40,000 units
 Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price.

Required:
(i) Calculate material variances based on consumption of material.
(ii) Calculate labour variances and the total variance for factory overhead.
(iii) Prepare Income statement for June, 2007 showing actual gross margin.
(iv) An incentive scheme is in operation in the company whereby employees are paid
a bonus of 50% of direct labour hour saved at standard direct labour hour rate.
Calculate the Bonus amount.

Solution:

Part 1: Calculation of material variance [partial plan – at the time of

consumption]

1 2 3
SQ x SP AQ x AP AQ x SP
40960 units x 5kg x 4.2 205600 kg x 4.5 205600 kg x 4.2
860160 925200 863520

Material Variances:

 Material cost variance [1-2] = 65040A

 Material price variance [3-2] = 61680A
 Material usage variance [1-3] = 3360A

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

Part 2: Calculation of Labour variances and total FOH variance

1 2 3
SH x SR AH x AR AH x SR
40960 units x 3Hrs x 3 121200 hrs x 3.2 121200 hrs x 3
368640 387840 363600

Labour Variances:

 Labour cost variance [1-2] = 19200A

 Labour rate variance [3-2] = 24240A
 Labour efficiency variance [1-3] = 5040F

Factory overhead variance

 Absorbed overheads = 40960 units x 3.6 = 147456

 Actual FOH = 100000
 Total FOH variance = 47456F

Part 3: Calculation of Actual gross margin

Step 1: Calculation of selling price

 Standard cost = Rs 33.60 per unit

 Profit = 25% x 33.60 = Rs 8.40 per unit
 Selling price = Rs 42

Step 2: Valuation of closing stock of finished goods [at standard cost]

 Units in stock = 40960 – 40000 = 960 units

 Stock value at standard cost = 960 x 33.60 = 32256

Step 3: Calculation of Actual gross margin

A, Sales [40000 x 42] 1680000

B. Total cost
Materials purchases [225000 kg x 4.5] 1012500
Labour cost 387840
Overhead cost 100000
Total cost 1500340
C. Closing stock
Closing raw material @ actual cost [19400kg x 4.5] 87300
Closing stock of Fin goods 32256
Total stock value 119556
D. Cost of goods sold [B-C] 1380784
E. Gross margin [A-D] 299216

Part 4: Calculation of Bonus amount to workers

 Time allowed = 40960 units x 3 hrs = 122880 hrs

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

 Time taken = 121200 hrs

 Time saved = 1680 hrs
 Bonus = 50% x Time saved x SR = 840 hrs x 3 = Rs 2520

Question No: 21 Flexible budget and reconciliation

TQM Ltd has furnished the following information for the month ending 30th June 2010:
Particulars Master budget Actual
Units produced and sold 80000 72000
Sales 320000 280000
Direct materials 80000 73600
Direct wages 120000 104800
Variable overheads 40000 37600
Fixed overhead 40000 39200
Total cost 280000 255200

The standard costs of the products are as follows:

 Direct materials [1kg @ Re 1 per kg] = Re 1 per unit
 Direct wages [1 hr @ Rs 1.50 per hr] = Rs 1.50
 Variable overheads [1 hr @ Rs 0.50 per hr] = Rs 0.50
Actual results for the month show that 78400 kgs of material were used and 70400
labour hours were recorded.
Required:
Prepare flexible budget for the month and compare with actual results.
Reconcile the different profits.

Solution:

Step 1: Preparation of flexible budget [budget for act output]

Particulars Computation Amount

Sales 72000 x 4 288000
Direct materials 72000 x 1 72000
Direct labour 72000 x 1.5 108000
Variable overheads 72000 x 0.5 36000
Fixed overheads 40000
Standard profit 32000

Step 2: Calculation of variances

A. Material Variances

1 2 3
SQ x SP AQ x AP AQ x SP
72000 x 1kg x 78400 kg x 0.9388 78400 kg x 1
1
72000 73600 78400

Material Variances:

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

 Material cost variance [1-2] = 1600A

 Material price variance [3-2] = 4800F
 Material usage variance [1-3] = 6400A

B. Labour Variances

1 2 3
SH x SR AH x AR AH x SR
72000 x 1hr x 1.5 70400 hrs x 1.4886 70400 hrs x 1.5
108000 104800 105600

Labour Variances:

 Labour cost variance [1-2] = 3200F

 Labour rate variance [3-2] = 800F
 Labour efficiency variance [1-3] = 2400F

C. Variable overhead variances

1 2 3
AO x SR/u AVO AH x SR/hr
72000 x 0.5 37600 70400 hrs x 0.5
36000 37600 35200
VOH Variances:

 VOH cost variance [1-2] = 1600A

 VOH expenditure variance [3-2] = 2400A
 VOH efficiency variance [1-3] = 800F

D. Fixed overhead variances

Fixed overhead expenditure variance = Budgeted FOH – Actual FOH = 800F

E. Sales variances

BM = BP – SVC = 4 – 3 = Rs 1
AM = AP – SVC = 3.89 – 3 = Rs0.89

1 2 3
BQ X BM AQ X AM AQ X BM
80000 x 1 72000 x 72000 x 1
0.89
80000 64000 72000
Sales Variances:

 Selling price variance [3-2] = 8000A

 Sales volume profit variance [1-3] = 8000A

Step 3: Reconciliation statement

Particulars Amount

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

Budgeted profit 40000

Sales volume variance 8000A
Standard profit [flexible budget] 32000
Material price variance 4800F
Material usage variance 6400A
Labour rate variance 800F
Labour efficiency variance 2400F
VOH expenditure variance 2400A
VOH efficiency variance 800F
FOH expenditure variance 800F
Selling price variance 8000A
Actual profit 24800

Question No : 25 Reverse working

Compute the missing data indicated by “?” from the following:

Particulars Product – R Product – S

Budgeted units ? 400
Actual units 500 ?
Budgeted unit selling price 12 15
Actual unit selling price 15 20
Sales price variance ? ?
Sales volume variance 1200F ?
Total Sales variance ? ?

Sales mix variance for both the products together was Rs.450F.

Solution:

1 2 3 4
BQ x BP AQ x AP AQ x BP RAQ x BP
R ? x 12 500 x 15 500 x 12 ? x 12
S 400 x 15 ? x ? x ? x 15
20 15
? ? ? ?

Working note 1: Calculation of BQ of ‘R’

 Sales volume variance [1-3] = 1200F

 BQ x 12 – 6000 = -1200
 BQ x 12 = 4800
 BQ = 400

Working note 2: Calculation of AQ of ‘S’

 Let AQ of ‘S’ be S
 So total AQ = 500+S
 So RAQ of R = 250+0.5S; S = 250+0.5S
 Sales mix variance [4-3] = 450F

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

 [(250 x 0.5S) x 12 + (250 x 0.5S) x 15] – [6000 + 15S] = -450

 3000 + 6S + 3750 + 7.5S – 6000 – 15S = -450
 1.5S = 1200; S = 800
 So RAQ of R = 650 and S = 650

Table completed

1 2 3 4
BQ x BP AQ x AP AQ x BP RAQ x BP
R 400 x 12 500 x 15 500 x 12 650 x 12
S 400 x 15 800 x 20 800 x 15 650 x 15
10800 23500 18000 17550

Computation of other missing figures

 Sales price variance [3-2]: R = 1500F; S= 4000F

 Sales volume variance [1-3]: R = 1200F; S = 6000F
 Total sales variance [1-2]: R = 2700F; S = 10000F

Question No: 28 Reverse working

A company produces a product X using raw materials A and B. The standard mix of A
and B is 1:1 and the standard loss is 10% of input.
You are required to compute the missing figures indicated by? based on the
data given below:
Particulars A B Total
Standard price of raw materials [Rs/kg] 24 30
Actual input[kg] ? 70
Actual output [kg] ?
Actual price [Rs/kg] 30 ?
Standard input quantity[kg] ? ?
Yield variance ? ? 270A
Mix variance ? ? ?
Usage variance ? ? ?
Price variance ? ? ?
Cost variance 0 ? 1300A

Solution:

1 2 3 4
SQ x SP AQ x AP AQ x SP RAQ x SP
A ? x ? x ? x ? x 24
24 30 24
B ? x 70 70 x 30 ? x 30
30 x ?
Total ? ? ? ?

Working note 1: Calculation of Missing figures

 Let SQ be X. So SQ of A = 0.5X and B = 0.5X

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MT EDUCARE PVT LTD CA S.S.RAJAGOPAL FCA, GRAD CWA

 Let AQ be Y. So RAQ of A = 0.5Y and RAQ of B = 0.5Y

 Material Yield Variance = 1-4 = 270A

 24[0.5X-0.5Y] + 30[0.5X-0.5Y] = -270
 [0.5X – 0.5Y] x 54 = -270
 0.5X – 0.5Y = -5 [Equation 1]

 Material cost variance of A = 1-2 = Nil

 [0.5X x 24] – [(Y-70) x 30] = 0
 12X – 30Y +2100 = 0
 -12X + 30Y = 2100 [Equation 2]

Solving Equations 1 and 2 we get

X [SQ] = 100 and Y [AQ] = 110

Missing figures

 SQ of A and SQ of B = 100/2 = 50
 RAQ of A and RAQ of B = 110/2 = 55
 AQ of A = 110 – 70 = 40

 Material cost variance of B = 1-2 = 1300A

 [50 x 30] – [70x AP] = -1300
 70 x AP = 2800
 AP = 40

Table completed

1 2 3 4
SQ x SP AQ x AP AQ x SP RAQ x SP
A 50 [WN-1] x 40 [WN-1]x 30 40 x 24 55 [WN-1] x 24
24
B 50 [WN-1] x 70 x 40 [WN- 70 x 30 55 [WN-1]x 30
30 1]
Total 2700 4000 3060 2970

Computation of other missing figures

 Material Yield variance [1-4]: A = 120A; B = 150A

 Material Mix variance [4-3]: A = 360F; B = 450A; Total = 90A
 Material usage variance [1-3]: A = 240F; B = 600A; Total = 360A
 Material price variance [3-2]: A = 240A; B = 700A; Total = 940A
 Material cost variance [1-2]; A = 0; B = 1300A; Total = 1300A.
 Actual output = SQ x 90% = 100 x 90% = 90 units.

Note: Dear friends will give solutions to question 31 and 36 in the next post
after a week.

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