Special Revision Session – Paper 05

 
  Variance Analysis
 
  CL3 – Advanced Management Accounting
 
Section 01
 
 
01. What is an attainable standard?
i. A standard which includes no allowance for losses, waste and
inefficiencies. It represents the level of performance which is
attainable under perfect operating conditions
ii. A standard which includes some allowance for losses, waste and
inefficiencies. It represents the level of performance which is
attainable under efficient operating conditions
iii. A standard which is based on currently attainable operating
conditions
iv. A standard which is kept unchanged, to show the trend in costs

02. A company manufactures a single product L, for which the standard

material cost is as follows.
$ per unit
Material 14 kg @ $3 42

During July, 800 units of L were manufactured, 12,000 kg of material were

purchased for $33,600, of which 11,500 kg were issued to production.
SM Co values all inventory at standard cost.
What are the material price and usage variances for July?
Price Usage
i. $2,300 (F) $900 (A)
ii. $2,300 (F) $300 (A)
iii. $2,400 (F) $900 (A)
iv. $2,400 (F) $840 (A)
 Following information relates to Question No 03 & 04

A company expected to produce 200 units of its product, the Bone, in 2020.
In fact 260 units were produced. The standard labour cost per unit was $70
(10 hours at a rate of $7 per hour). The actual labour cost was $18,600 and
the labour force worked 2,200 hours although they were paid for 2,300
hours.

03. What is the direct labour rate variance for the company in 2020?

i. $400 (A)
ii. $2,500 (F)
iii. $2,500 (A)
iv. $3,200 (A)

04. What is the direct labour efficiency variance for the company in 2020?

i. $400 (A)
ii. $2,100 (F)
iii. $2,800 (A)
iv. $2,800 (F)

05. Extracts from a company's records from last period are as follows.
Budget Actual
Production 1,925 units 2,070 units
Variable production overhead cost $11,550 $14,904
Labour hours worked 5,775 8,280

What are the variable production overhead variances for last period?
Expenditure Efficiency
i. $1,656 (F) $2,070 (A)
ii. $1,656 (F) $3,726 (A)
iii. $1,656 (F) $4,140 (A)
iv. $3,354 (A) $4,140 (A)
 06. A company has budgeted to make and sell 4,200 units of product X
during the period.
The standard fixed overhead cost per unit is $4.
During the period covered by the budget, the actual results were as follows.
Production and sales 5,000 units
Fixed overhead incurred $17,500
What are the fixed overhead variances for the period?
Fixed overhead Fixed overhead
expenditure variance volume variance
i. $700 (F) $3,200 (F)
ii. $700 (F) $3,200 (A)
iii. $700 (A) $3,200 (F)
iv. $700 (A) $3,200 (A)

07. A company manufactures a single product, and relevant data for

December is as follows.
Budget/standard Actual
Production units 1,800 1,900
Labour hours 9,000 9,400
Fixed production overhead $36,000 $39,480

What are the fixed production overhead capacity and efficiency

variances for December?
Capacity Efficiency
i. $1,600 (F) $400 (F)
ii. $1,600 (A) $400 (A)
iii. $1,600 (A) $400 (F)
iv. $1,600 (F) $400 (A)

08. A company currently uses a standard absorption costing system. The

fixed overhead variances extracted from the operating statement for
November are:
$
F/P overhead expenditure variance 5,800 adverse
F/P overhead capacity variance 4,200 favourable
F/P overhead efficiency variance 1,400 adverse

PQ Limited is considering using standard marginal costing as the basis for

variance reporting in future. What variance for fixed production overhead
would be shown in a marginal costing operating statement for November?

i. No variance would be shown for fixed production overhead

ii. Expenditure variance: $5,800 adverse
iii. Volume variance: $2,800 favourable
iv. Total variance: $3,000 adverse

09. Which of the following situations is most likely to result in a favourable

selling price variance?
i. The sales director decided to change from the planned policy of
market skimming pricing to one of market penetration pricing
ii. Fewer customers than expected took advantage of the early
payment discounts offered
iii. Competitors charged lower prices than expected, therefore selling
prices had to be reduced in order to compete effectively
iv. Demand for the product was higher than expected and prices could
be raised without adverse effects on sales volumes

10. A company uses a standard absorption costing system. The following

details have been extracted from its budget for April.

Fixed production overhead cost $48,000

Production (units) 4,800
In April the fixed production overhead cost was under absorbed by
$8,000 and the fixed production overhead expenditure variance was
$2,000 adverse.
What was the actual number of units produced?

i. 3,800
ii. 4,200
iii. 4,800
iv. 5,800
The following information relates to questions 11 to 14

A company manufactures a single product. An extract from a variance control

report together with relevant standard cost data is shown below.

Standard selling price per unit $70

Standard direct material cost (5 kg x $2 per kg) $10 per unit
Budgeted total material cost of sales $2,300 per month
Budgeted profit margin $6,900 per month

Actual results for February

Sales revenue $15,200
Total direct material cost $2,400
Direct material price variance $800 adverse
Direct material usage variance $400 favourable

There was no change in inventory levels during the month.

11. What was the actual production in February?

i. 200 units
ii. 217 units
iii. 240 units
iv. 280 units

12. What was the actual usage of direct material during February?
i. 800 kg
ii. 1,000 kg
iii. 1,200 kg
iv. None of these
 
 
13. What was the selling price variance for February?
i. $120 (F)
ii. $900 (A)
iii. $1,200 (A)
iv. $1,200 (F)
14. What was the sales volume profit variance for February?
i. $900 (F)
ii. $1,200 (F)
iii. $900 (A)
iv. $2,100 (A)

15. A company purchased 6,850 kgs of material at a total cost of $21,920. The
material price variance was $1,370 favourable. What was the standard
price per kg?
i. $0.20
ii. $3.00
iii. $3.20
iv. $3.40

16. Last month a company budgeted to sell 8,000 units at a price of $12.50
per unit. Actual sales last month were 9,000 units giving a total sales
revenue of $117,000.

What was the sales price variance for last month?

i. $4,000 Favourable
ii. $4,000 Adverse
iii. $4,500 Favourable
iv. $4,500 Adverse

17. A company uses a standard absorption costing system. Last month

budgeted production was 8,000 units and the standard fixed production
overhead cost was $15 per unit. Actual production last month was 8,500
units and the actual fixed production overhead cost was $17 per unit.
What was the total adverse fixed production overhead variance for last
month?
i. $7,500
ii. $16,000
iii. $17,000
iv. $24.500
 18. AD Ltd manufactures and sells a single product, E, and uses a standard
absorption costing system. Standard cost and selling price details for
product E are as follows.
$ per unit
Variable cost 8
Fixed cost 2
10
Standard profit 5
Standard selling price 15

The sales volume variance reported for last period was $9,000 adverse. AD Ltd
is considering using standard marginal costing as the basis for variance
reporting in future. What would be the correct sales volume variance to be
shown in a marginal costing operating statement for last period?

i. $6,428 (A)
ii. $6,428 (F)
iii. $12,600 (F)
iv. $12,600 (A)

19. When comparing the profits reported under absorption costing and
marginal costing during a period when the level of inventory increased,
which of the following is true?
i. Absorption costing profits will be higher and closing inventory
valuations lower than those under marginal costing
ii. Absorption costing profits will be higher and closing inventory
valuations higher than those under marginal costing
iii. Marginal costing profits will be higher and closing inventory
valuations lower than those under absorption costing
iv. Marginal costing profits will be higher and closing inventory
valuations higher than those under absorption costing

20. PH Ltd produces a single product and currently uses absorption costing
for its internal management accounting reports. The fixed production
overhead absorption rate is $34 per unit. Opening inventories for the
year were 100 units and closing inventories were 180 units. The
company's management accountant is considering a switch to marginal
costing as the inventory valuation basis.
 If marginal costing were used, the marginal costing profit for the year,
compared with the profit calculated by absorption costing, would be which
of the following?
i. $2,720 lower
ii. $2,720 higher
iii. $3,400 lower
iv. $3,400 higher

Section 02

Sprinkles (Pvt) Ltd (SPL) is a confectionery manufacturer that makes several
products in different production divisions. The cake division of SPL produces a
standard type of fruit cake (in 1 kg) and distributes it to its outlets located
island-wide.
The following information is relevant for this product for the month of
November 2019.

 Standard utilisation of resources per kg of fruit cake

Material A (at Rs. 400 per kg) 500 grams

Material B (at Rs. 600 per kg) 400 grams
Cake compound (at Rs. 1,200 per kg) 200 grams
Direct labour (at Rs. 300 per hour) 30 minutes

 Budgeted profit for the month of November 2019

The following information is also relevant for the month of November 2019.

 During the month of November, 6,000 kg of fruit cakes were actually

produced and sold at a price that was 7% higher than the budgeted price.

 3,000 kg each of Material A and Material B were purchased and fully

utilised in production during the month. The purchase prices of Material
A and Material B were Rs. 410 per kg and Rs. 580 per kg, respectively.
1,500 kg of cake compound were purchased for Rs. 1.65 million and
utilised in full during the month.

 3,600 labour hours were actually used in production at a cost of Rs. 1.26
million.

 SPL absorbs fixed production overheads based on labour hours.

 SPL’s actual operating profit computed by the management accountant of

the company for the month of November 2019 was Rs. 2.568 million.

Required:
(a) Explain the importance of preparing a flexible budget in performance
evaluation.

(b) Prepare a budgetary control statement (including the flexed budget,

actual results and budget variances) for the month of November 2019.

(c) Compute the following variances.

(i) Material price and usage variances
(ii) Labour rate and efficiency variances
(iii) Fixed overhead expenditure variance
(iv) Fixed overhead volume variance
(v) Selling price variance
(vi) Sales volume profit variance

(d) Prepare the operating statement to reconcile the budgeted operating

profit with the actual operating profit.
(e) SPL for the past couple of months recorded adverse variances in material
usage for Material B. Therefore, the management is now considering carrying
out an investigation on these adverse variances.
Explain two (02) considerations that the management should take account of
before proceeding with the investigation.

(ICASL – 2019 December Q 06)

 Question 02
York Products (Pvt) Ltd (YPP) makes an Ayurvedic soap, in batches, and sells to the
local market. The standard cost of labour for each batch is Rs. 600 and the standard
labour time for each batch is 3 hours. YPP, for the month of March, had budgeted to
produce 10,000 batches. However, it actually produced only 8,000 batches.
26,400 labour hours were used to complete the production, with no idle time. The
actual total labour cost for March was Rs. 4,752,000.

Market research indicated that the soap is having less ayurvedic aroma than the
competitors’ products in the market. Therefore, the production technicians made a
slight change in the raw material recipe, effective March. It is expected that this recipe
change would utilise 15% more labour time than before, in the first month of operation,
and in the second month, the labour time would normalise at 10% slowdown, compared
with the current operation.

Further, as an initiative to cut higher labour cost, the managing director at the end of
February, announced an offer to staff, the choice of either accepting a 10% pay cut or
facing redundancy of a certain number of employments. Subsequently all workers
agreed to the 10% pay cut.

Required:

(a) Calculate the following variances for YPP for the month of March.

(i) Labour rate planning variance

(ii) Labour rate operating variance
(iii) Labour efficiency planning variance
(iv) Labour efficiency operating variance
(6 marks)

(b) Assess the performance of the production manager, for the month of March,
based on the results in (a) above.
(4 marks)

The standard raw material recipe which was revised in order to meet the aromatic level
is given below.

Material Standard price Revised recipe

per kg per batch of
soap
Vegetable fat Rs. 175 9.0kg
Natural aromatic base Rs. 4,000 0.3kg
Chemical compound Rs. 950 0.7kg
The purchasing manager was able to purchase the items at the standard price. The
actual utilisation for production was as follows.

Material Quantity utilised

Vegetable fat 71,500kg
Natural aromatic base 3,200kg
Chemical compound 6,300kg
Total 81,000kg

Required:
(c) Assess the performance of the production manager for the month of March, in
light of material mix variance and material yield variance.
(12 marks)

(d) Explain how Process Benchmarking could be used within YPP, in order to
improve operational efficiencies.
(3 marks)

(Total: 25 marks)
Question No. 03

CAL (Pvt) Ltd, manufactures Product X by using an engineering process and operates a standard
costing system to value the output and work in progress. Given below are the standard cost
details of the Product X.

Standard cost of 1 Kg of Product X

Direct Material A 0.6 Kg @ Rs. 650 per Kg (introduced at the beginning)

Direct Material B 0.5 Kg @ Rs. 415 per Kg (introduced at the beginning)
Direct Labour 12 minutes @ Rs. 400 per hour (evenly throughout the process)
Variable Overheads 12 minutes @ Rs. 300 per hour (evenly throughout the process)
Fixed Overheads 12 minutes @ Rs. 500 per hour (for completed output)

Normal waste of the process is equivalent to 1/11 of the input which occurs at an even rate
throughout the process from both materials. Budgeted output per month is 25,000Kgs.

Following information is also given for the month of November 2013.

 Opening and closing material balances for the month are:

Opening
Material A 2,300 Kgs purchased at Rs. 645 per Kg
Material B 4,000 Kgs purchased at Rs. 410 per Kg
Closing
Material A 4,000 Kgs
Material B 3,500 Kgs

Materials are recorded at their actual costs and issues for the production are being made at
standard cost based on first in first out method. Material price variances are calculated in two
instances which are:

 At the time of purchasing materials for performance evaluation of Purchasing Officer.

 At the time of issuing materials for production for the accounting purposes.

During the month, 18,300 Kgs of Material A and 13,000Kgs of material B were purchased at
Rs. 645 per Kg and Rs. 430 per Kg respectively.

 Opening Work in Progress = 3,150 Kgs of 50% completed goods

Closing Work in Progress = 4,160 Kgs of 60% completed goods

 The output is completed on first in first out basis and 25,500Kgs were transferred to the
packing division during the month of November.

 Wages paid for the month were Rs. 2.34 million at Rs. 390 per hour.
 Variable overhead cost and fixed overhead cost incurred during the month were Rs. 1.45
million and Rs. 2.7 million, respectively.
Using the above information you are required to:
(a) Calculate the material price variance and comment on the performance of the purchasing
officer.
(3 marks)
(b) Prepare a statement of equivalent units for the month of November.
(5 marks)
(c) Prepare a variance report for accounting purposes using the information in the statement
of equivalent units, including following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour usage variance
(v) Variable overhead expenditure variance
(vi) Variable overhead efficiency variance
(vii) Fixed overhead expenditure variance
(5 marks)
(d) Comment on the actual material mix and yield and their contribution to material usage
variance as calculated above.
(5 marks)
(Total 18 marks)