Accounting, Behaviour and Control

Tut 4

10.3 Distinguish between perfection standards and practical standards. Which type of standard is
likely to produce the best motivational effects?

• A perfection (or ideal) standard is the cost expected under perfect or ideal operating
conditions.
• A practical (or attainable) standard is the cost expected under normal operating
conditions.
Many people question the effectiveness of perfection standards and feel that employees are most
likely to perform well when they achieve an attainable standard than when they strive, often
unsuccessful, to achieve a perfection standard.

10.13 Explain why a favourable variance does not necessarily indicate ‘good performance’.

A favourable variance could be due to loose or inaccurate standards that are encouraging
inefficient practices. Favourable variance can also occur due to unfavourable practices such as
using inferior quality inputs, which leads to poor quality outputs and loss of sales.

1.
Direct Material Cost = 1,000units X 20kg X $2.70
= $54,000
Direct Labour Cost = 1,000 units X 4hrs X $34
= $136,000

Total Standard Production Cost = $54,000 + $136,000

= $190,000
 2.

a. Direct Material Price Variance

PQ(AP – SP)
PQ = quantity purchased = 36,000kg
AP = actual price = $2.76
SP = standard price = $2.70

36,000(2.76-2.70)
= 36,000(0.06)
=$2,160 (Unfavourable as AP>SP)

b. Direct Material Quantity Variance

SP(AQ – SQ)
SP = standard price = $2.70
AQ = actual quantity used = 19,000kg
SQ = standard quantity used, given actual output = (20kg X 1,000units) = 20,000

2.70(19,000-20,000)
= 2.70(1,000)
= $2,7000 (Favourable as AQ<SQ)

c. Direct Labour Rate Variance

AH(AR – SR)
AH = actual hours used = 4,200hrs
AR = actual rate per hour = $36
SR = standard rate per hour = $34

4,200(36-34)
= 4,200(2)
= $8,400(Unfavourable as AR>SR)

d. Direct Labour Efficiency Variance

SR(AH – SH)
AH = actual hours used = 4,200hrs
SH = standard hours allowed, given actual output = (4 X 1,000) = 4,000hrs
SR = standard rate per hour = $34

34(4,200 – 4,000)
= 34(200)
= $6,800( Unfavourable as AH>SH)
1.
Grade A Fertiliser

Direct Material Price Variance = PQ(AP – SP)

PQ = quantity purchased = 5,000kg
AP = actual price = $0.53
SP = standard price = $0.50

5,000(0.53 – 0.50)
= 5,000(0.03)
= $150 (Unfavourable as AP>SP)

Direct Material Quantity Variance = SP(AQ – SQ)

SP = standard price = $0.50
AQ = actual quantity used = 3,700kg
SQ = standard quantity used, given actual output = 55clients X 2 Grade A Application X
40kg/Application = 4,400kg

0.50(3,700 – 4,400)
= 0.50(700)
= $350 (Favourable as AQ>SQ)
Grade B Fertiliser

Direct Material Price Variance = PQ(AP – SP)

PQ = quantity purchased = 10,000kg
AP = actual price = $0.40
SP = standard price = $0.42

10,000(0.40 - 0.42)
= 10,000(0.02)
= $200 (Favourable as AP<SP)

Direct Material Quantity Variance = SP(AQ – SQ)

SP = standard price = $0.42
AQ = actual quantity used = 7,800kg
SQ = standard quantity used, given actual output = 55clients X 4 Grade B Application X
40kg/Application = 8,800kg

0.42(7,800-8,800)
= 0.42(1,000)
= $420 (Favourable as AQ<SQ)

2.

Direct Labour Variance = AH(AR – SR)

AH = actual hours used = 165hrs
AR = actual rate per hour = $34.50
SR = standard rate per hour = $27

165(34.50 – 27)
= 165(7.50)
= $1237.50 (Unfavourable as AR < SR)

Direct Labour Efficiency Variance = SR(AH – SH)

AH = actual hours used = 165hrs
SH = standard hours allowed, given actual output = 40mins X 55clients X 6 Applications = 220hrs
SR = standard rate per hour = $27

27(165 – 220)
= 27(55)
= $ 1,485 (Favourable as (AH<SH)

3.

Total Cost of the new service:

Grade A Fertiliser = Actual Quantity Used X Actual Price

= 3,700 X $0.53
= $1,961
Grade B Fertiliser = Actual Quantity Used X Actual Price
= 7,800 X $0.40
= $3,120

Labour = Actual Labour Hours X Actual Rate

= 165hrs X $34.50
= $5,692.50

Total Cost = $1,961 + $3,120 + $5,692.50

= $10,773.50

Revenue = 55 clients X 6 Application X $40/Application

= $13,200

Profit/ Loss = Total Revenue - Total Cost

= $13,200 - $10,773.50
= $2,426.50. The new service is a financial success as it has been profitable.

4.
Grade A fertiliser:

Price variance $150.00 Unfavourable

Quantity variance 350.00 Favourable

Grade B fertiliser:

Price variance 200.00 Favourable

Quantity variance 420.00 Favourable

Direct labour:

Rate variance 1 237.50 Unfavourable

Efficiency variance 1 485.00 Favourable

Total material and labour variances $1 067.50 Favourable

A.
B.
Favourable labour efficiency variance means that less time is being spent on the job; employee is
rushing and doing sloppy work.
Favourable quantity variance;
use of less fertiliser than budgeted (results in: increased occurrence of weeds, lack of greening,
etc)

5.

• hire a full-time employee,

• ensure employee skilled
• standard amount of fertiliser is applied
• the profit would have been reduced to $1359 (profit – total favourable variance =
$2426.50 - $1067.50)
• may wish to increase his prices for next year.
1.

2.
a. Role of the purchasing manager
• establishing standard cost for DM;
• determining if the company should take advantage of price reduction;
• obtaining data regarding the availability of materials

b. Role of the production manager

• overseeing the preparation of bill of materials for production;
• establishing any allowances for scrap, shrinkage, and waste;
• managing time studies and test runs to facilitate the establishment of labour time
standards

c. Role of the management accountant

• reviewing all information regarding material and labour standards
• establishing the labour rate standards based on the type of labour required
• determining application rates for indirect costs
• converting physical standards such as hours and quantities to monetary equivalents

3.
a.
• Failed to update the standard costs when product specifications changed
• Actual costs are being compared to inappropriate standard cost.
If used appropriately, standard costing beneficial:
• detailing the std quality of materials/ labour that should be used in production.
• providing a benchmark against which to compare actual cost.
• guiding attention towards questions regarding performance (determining reasons for
variances)
• Motivator to encourage desirable performance
b.