TOPIC

STANDARD COSTING AND VARIANCES

Standard costing is most suited in Organisation whose activities consist of series of common or
repetitive operations and the input required to produce each unit of output can be specified. It is
therefore relevant in manufacturing companies, since the process involved are often of a repetitive
nature. Standard costing procedures can also be applied in services industries such as units within
banks, where output can be measured in terms of the number of cheques or the number of loan
applications processed, and there also well-defined input-output relationships. Standard costing cannot,
however, be applied to activities of a non repetitive nature,
A standard costing system can be applied to organizations that produce many different products, as
long as production consists of a series of common operations. For example, if the output from a factory
is the result of five common operations, it is possible to produce many different product variations from
these operations. It is therefore possible that a large product range may result from a small number of
common operations. Thus standard costs should be developed for repetitive operations and product
standard costs are derived simply by combining the standard costs from the operations which are
necessary to make the product.
Standard costs are predetermined costs; they are target costs that should be incurred under efficient
operating conditions. They are not the same as budgeted costs. Budgeted costs relate to an entire
activity or operation, a standard presents the same information on a per unit basis. A standard
therefore provides cost expectations per unit of activity and a budget provides expectation for
the total activity.

Prepared by:
Mwinyi-Tutor
Take an overview of standard costing system below:
Standard cost of actual output Actual costs traced to each
recorded for each
responsibility centre Responsibility centre

Standard and Actual

cost
Compared and variances
analyzed and reported

Variances investigated
and corrective action
taken

Standards monitored and

adjusted to reflect
changes in standard
usage or price

ESTABLISHING OF STANDARD COST

There are two approaches that can be used to set standard costs such as
1. Historical records can be used to estimate labour and material usage
2. Based on engineering studies, with engineering studies a detailed study of each operation
is undertaken based on careful specifications of materials, labour and equipment and on
controlled observations of operations.
If Historical records are used to set standards, there Is a danger that the latter will include past
inefficiencies. With this approach, standards are set based on average pat performance for the same or
similar operations. The disadvantage of this method is that, unlike the engineering method, it does not
focus attention on finding the best combination of resources, production methods and product quality.
USES OF STANDARD COSTING
1. Standard costing is useful for performance evaluation
2. More useful for inventory valuation
3. For decision making
4. For setting budget
TYPES OF STANDARD COSTING
1. Basic standards
These are standards established considering those factors that are basic in nature and remain
unchanged over a period of time and are altered only when the business operations change
significantly affecting the basic foundations of the entity and nature of the business. These
standards help to compare the business operations over a long period of time. Basic standards
are used not only to evaluate actual results but also current expected results (current results).
We can say that the basic standards work as a standard for other standards. As basic
standards are not updated according to latest circumstances thus they are not used often as
they cannot help in short term period variance analysis.
OR
These are long-term standards which remain unchanged over a period of years.
• Their sole use is to show trends over time for such items as material prices, labour rates and
efficiency and the effect of changing methods.
• They cannot be used to highlight current efficiency.
• These standards may demotivate employees if, over time, they become too easy to achieve
and, as a result, employees may feel bored and unchallenged

2. Ideal standards
These standards represent what business operations would be under ideal set of
circumstances where everything is running at the optimum level with an ideal balance. These
standards are representative of long term goals rather than for short term performance
measurement. But with the advancement of technology and inventions even the ideal
standards become attainable over the period of time but with every step taken forward and
every question answered, more questions and more complexities pop up and its in human
nature that it always extends the way forward with every milestone achieved. Therefore, ideal
standards are not meant to be achieved rather to act like a guiding star.

3. Attainable standards/Expected standards

These standards are based on current conditions and circumstances and represents what can
be attained with the present setup in place and if the current conditions prevail. Current
standards may be set lower or easier then expected standards but good managers try to
achieve what is attainable so that no resource is left unused. It means that attainable standards
are representative of the potential that business is capable to achieve. For example machinery
is expected to run for 4,000 hours where it can run for 5,000. Thus current standard is 4,000
hours where attainable is 5,000 hours. These standards are useful as they help management
to analyse their performance and to use the unused potential at the right time.
OR
They are based upon efficient (but not perfect) operating conditions.
• The standard will include allowances for normal material losses, realistic allowances for
fatigue, machine breakdowns, etc.
• These are the most frequently encountered type of standard.
 • These standards may motivate employees to work harder since they provide a realistic but
challenging target.

4. Current standards
These standards are representative of current business conditions. These are mostly short
term in nature and are widely used as they are the most relevant standards to be used for
control purposes. These standards represent the state that business currently achieving or
must achieve.
OR
These are standards based on current working conditions.
• They are useful when current conditions are abnormal and any other standard would provide
meaningless information.
• The disadvantage is that they do not attempt to motivate employees to improve upon current working
conditions and, as a result, employees may feel unchallenged.

THE FOLLOWING ARE THE CONCEPT USED IN STANDARD COSTING

1. DIRECT MATERIAL STANDARDS
This describes and states the required quantity of material for each operation to complete the
product.
The standard material product cost is then found by multiplying the standard quantities by the
appropriate standard prices.
The standard prices are obtained from the purchasing department. The standards material
prices are based on the assumption that the purchasing department has carried out a suitable
search of alternative suppliers and has selected suppliers who can provide the required
quantity of sound quality material at the most competitive price

2. DIRECT LABOUR STANDARDS

To set labour standards, activities should be analyzed by the different operations. Each
operation is studied and an allowed time computed. The normal procedure for such a study is
to analyze each operation to eliminate any unnecessary elements and to determine the most
efficient production method. This is found by multiplying the standard hours with the standard
rate set by the organization.

3. OVERHEAD STANDARDS
The procedure for establishing standard manufacturing overhead rate for a standard costing
system is the same as that which is used for establishing predetermined overhead rates.
Separate rates for fixed and variable overheads are essential for planning and control.
Fixed overheads are largely independent of changes in activity,
 STANDARD COSTING AND VARIANCE

BASIC VARIANCE ADVANCED VARIANCE

Operational and planning variance Sales mix Sales quantity
Material mix Material Yield

Material Variance

Material Price Material Usage

variance Variable Overhead Fixed overhead
Variance Variance Variance

Material mix Material Expenditure Capacity Efficiency

Variance Yield
Variable Overhead Variable overhead Volume variance
Expenditure efficiency variance

Labour rate variance Labour efficiency variance

Labour mix variance Labour yield variance

MATERIAL VARIANCES
MATERIAL PRICE VARIANCES AND MATERIAL USAGE VARIANCES
Material variances can be either favourable or adverse; the following is the formular that is
used in the calculation of material price variances and material usage variances
1. MATERIAL PRICE VARIANCES
(SP-AP) X AQ
SP= Standard price
AP= Actual price
AQ= Actual quantity

Causes of Material price variances

Material price variances can be either favourable or adverse, they are depending on the
situation, Favourable means Standard price are greater than Actual price, while Adverse
means Actual price are greater than standard price.

Exhibit
Zero variances Favourable variances adverse variance
SP = AP SP > AP SP < AP

The following are causes of adverse and favourable material price variances
a. Efficiency of the Purchases department/Inefficiency purchases system.
b. Bargaining power of the Purchases department.
c. Fluctuation of marketing prices/changes of marketing condition/changes of marketing
price
d. Purchases of high quality materials.
e. Uses of substitute material of seasonal purchases.
f. Uneconomic size of purchase order.
g. Failure to take advantage of seasonal purchases.
h. Loss of discount.
i. Emergency purchase.
j. Changes in taxes and duties.
k. Incorrect shipping instructions.
l. Acceptance of orders requiring special purchases, high transportation cost.

2. MATERIAL USAGE VARIANCES

(SQ - AQ) X SP
SQ = Standard quantity for actual output
AQ = Actual quantity purchased/used
SP= Standard price
BUT
SQ= Output produced X standard requirements per unit
 The following are causes of adverse and favourable material usage variances
a. Changes in method of production.
b. Quality of the material purchased/Poor quality material.
c. Careless handling of materials.
d. Purchases of inferior quality materials.
e. Changes in quality control requirement.
f. Careless handling of materials.
g. Improperly setting standards.
h. Pilferage of materials.
i. Changes in mix.
j. Changes in design.
k. Faulty machine processing.
l. Poor inspection.
m. Improper engineering specification.
n. Substitution by non-standard material.
o. Labour inefficiency

Exhibit
Zero variance Favourable variance adverse variance
SQ = AQ SQ > AQ SQ < AQ

NOTE: But we have the second alternative (Matrix Method)

QTY A A SA

PRICE A S S

Material price variances Material usage variances

Direct material variance = SC - AC
Material Usage Variaces = SQ X SP – AQ X SP
Material price variances = AQ X SP – AQ X AP

NOTE:
AQ X AP = Actual material cost
Summation of material price and usage variances are called material cost variances
3. LABOUR RATE AND LABOUR EFFICIENCY VARIANCES
LABOUR RATE VARIANCE
This is the difference between the Standard rate and actual rate per hour multiplied by the
actual labour hour.
LABOUR RATE VARIANCE = (SR – AR) XAH
Where:
SR = Standard rate per hour
AR = Actual rate per hour
AH = Actual hour worked

Reasons of Labour rate

a. Negotiated increase in wage rates not yet having been reflected in the standard wage
rate.
b. Assignment of skilled labour to work that is normally performed by unskilled labour.
c. Unexpected Overtime payments.
d. Government intervention.
e. Use of defective grading of employees.
f. Payment of wage at higher rates to carry on emergency operations.
g. Revision of pay scales due to national awards.
h. Establishment of incorrect standards by personal Department.
i. New workers not being allowed full wage rate.

LABOUR EFFICIENCY VARIANCE

This is the difference between the Standard hour and the Actual hour multiplied by the
Standard rate
LABOUR EFFICIENCY VARIANCE = (SH – AH) X SR
Where:
SH = Standard hour for actual output
AH = Actual hour
SR = Standard rate
Reasons for labour efficiency variances
a. Use of inferior quality materials.
b. Different grades of labour.
c. Failure to maintain machinery in a proper condition/Poor maintenance and repair of
machine.
d. The introduction of the new equipment or tools.
e. Change in the production process.
f. Poor production scheduling/Poor scheduling of production process.
g. Learning curve effects.
h. Recent retrenchment.
i. Changes in quality control standard.
j. Poor supervision of workers.
k. Frequent power failure.
l. Incorrect recording of performance.
m. Increase in labour turnover.
n. Go-slow technique of employees.
o. Use of employees with low competence.

H A A SA

R A S S

Labour rate variance Labour efficiency variance

Direct labour variance = SC - AC

Labour efficiency variance = SH X SR – AH X SR
Labour rate variance = AH X SR – AH X AR

NOTE:
AH x AR = Actual labour cost incurred
VARIABLE OVERHEADS AND FIXED OVERHEADS VARIANCES
1. VARIABLE OVERHEADS VARIANCES
Total variable overheads variance is the difference between the standard variable
overheads charged to production (SC) and the actual variable overheads incurred (AC)
It is normally assumed that variable overheads vary with direct labour or machine hours of
input. The total variable overhead variance will therefore be due to one or both of the
following:
Variable overhead expenditure variance
Is the difference between the Standard absorption rate and Actual rate multiplied by the
Actual hours (AH)
(SR – AR) X AH
Where:
SR = Standard rate (absorption rate)
AR = Actual rate (absorption rate)
AH = Actual hour
Variable overhead efficiency variances is the difference between the standard hours of
output (SH) and the actual hours of input (AH) for the period multiplied by the standard
variable overhead rate (SR)
(SH - AH) X SR

Where:
SH = Standard hours for actual output
AH = Actual hours
SR = Standard rate (absorption rate)

Second alternative (Matrix Method)

H A A SA

R A S S

Variable overhead Variable overhead

Expenditure variance efficiency variance
 Causes of variable overhead efficiency variance
a. Use of inferior quality materials.
b. Use of different grades of labour.
c. Failure to maintain machinery in proper condition.
d. Introduction of new equipment or tools.
e. Changes in the production process.
f. Poor production scheduling by the planning department.
g. Learning curve effect.
h. Change in quality control standard.
i. Poor working condition.
j. Frequent power failure.
k. Improperly set standards.
l. Poor supervision.

2. FIXED OVERHEADS VARIANCES

This variance categorised into three groups such as
a. Expenditure variance
b. Volume Capacity variance
c. Volume Efficiency variance
If you plus both capacity and efficiency, you get Fixed overhead volume variance

a. Expenditure variance
Is the difference between the budgeted fixed Overhead and Actual fixed overhead.
Fixed overheads Expenditure variance = BH X SR – AH X AR
Where: Actual overhead = AH X AR
Budgeted overhead = BH X SR
Or
Fixed overhead expenditure = BFO – AFO

b. Volume Capacity variance

Is the difference between the actual hours of input (AH) and the budgeted hours of
input (BH) for the period multiplied by the standard fixed overhead rate (SR):
(AH – BH) XSR
SR= Standard absorption rate
BH= Budgeted hours
AH=Actual hours
 c. Volume efficiency variance
Is the difference between the standard hours of output (SH) and the actual hours of
input (AH) multiplied by the standard fixed overhead rate (SR).
(SH – AH) X SR
SH= Standard hours
AH=Actual hours
SR= Standard rate (absorption rate)

NOTE: Volume variance is the difference between Actual production (AP) and budgeted Production
(BP) for a period multiplied the standard fixed overhead rate (SR).
(AP – BP) X SR

General Causes of fixed overhead variances

1. Changes of the method of production
2. Poor production scheduling
3. Introduction of new equipment or tools
4. Uses of different grades of labour.
5. Learning curve effect.
6. Failure to maintain machinery in a proper condition.

Specific causes of capacity variances

1. Change in scheduling production process.
2. Labour troubles.
3. Slump in customers demand.
4. Shortage of materials.
5. Machine breakdown.
6. Power failures.
7. Lock-out.

Specific causes of expenditure variances

1. Improper use of available facility.
2. Use of efficient tools, tackles and construction equipment.
3. Seasonal conditions.
4. Improper set standards.
Second alternative (Matrix method)
H A B A SA

R A S S S

Fixed overhead Fixed overhead Fixed

overhead
Expenditure variance Capacity variance Efficiency

Overhead Volume variance

B. ADVANCED COST VARIANCES
a. Material Price variances
b. Material Mix variances
c. Material Yield variances

Q A A A SA

Mix A A S S

P A S S S

Material price variance Material Mix variance Material Yield variance

Material usage variance

Material price variance = Actual quantity to Actual mix X SP – Actual quantity to Actual mix X AP
Material mix variance = Actual quantity to standard mix X SP – Actual quantity to actual mix X
SP
Material Yield variance = Standard quantity to standard mix X SP – Actual quantity to standard
mix X SP
SALES MARGIN VARIANCE
This variance categorized under the following types
a. Sales margin price variance
b. Sales margin mix variance
c. Sales margin Yield/quantity

Q A A A S

Mix A A S S

P A S S S

Sales price variance Sales margin Mix variance Sales Yield/Quantity

Margin variance

Sales margin volume variance

Sales Margin price variance = Actual quantity to actual mix X AP – Actual quantity to actual mix
X SP
Sales Margin mix variance = Actual quantity to actual mix X SP – Actual quantity to standard
mix X SP
Sales Margin yield/quantity variance = Actual quantity to standard mix X SP – Standard quantity
to standard mix X SP
NOTE:
We shall discuss later on market share variance and market size variance
Means the summation of market share variance and market size variance = Sales margin quantity/Yield
variance
Summation of sales margin mix variance and Sales Margin Yield/Quantity variance is Sales
Margin Volume Variance.
Sales Margin mix variance + Sales Margin Yield/Quantity Variance = Sales Margin Volume
variance.
A. SALES MARGIN PRICE VARINACE
This is the difference between Actual price and standard price of actual sales affected.
Sometimes it is necessary to adapt the selling price of the product of changing in marketing
condition by raising or lowering the prices.

B. SALES MARGIN MIX VARIANCE

This is due to the changes in actual sales mix and budgeted sales mix. It arises because actual
sales mix does not always remain constant. It has to be changed due to changing marketing
condition.

C. SALES MARGIN YIELD/QUANTITY VARIANCE

This is the difference between standard sales margin on actual sales affected, It these sales
had been in the ratio of standard mix and standard sales margin on standard sales mix or
budgeted sales margin for the sales as per budgeted. Also sales margin quantity/Yield variance
is obtained by taking the summation between market share variance and market size variance.

CONCEPT OF PLANNING AND OPERATIONAL VARIANCE

A RV S

Operation Planning
Planning variances in Material cost
a. Material price planning variance
This happen when there is the difference between SP and RP or (SP – RP) X AQ
SP = Standard price
RP = Revised price
AQ = Actual quantity

b. Material usage planning variance

This is the difference between SQ and RQ or (SQ – RQ) XSP
SQ = Standard quantity for actual output
RQ = Revised quantity
SP = Standard price

Operational variance in material cost

a. Material price operational variance
This is the difference between RP and AP multiplied by AQ or (RP – AP) X AQ
RP = Revised price
AP = Actual price
 AQ = Actual quantity

b. Material usage operational variance

This is the difference between the RQ and AQ multiplied by SP or
(RQ – AQ) X SP
RQ = Revised quantity
AQ = Actual quantity
SP = Standard price

LABOUR RATE AND EFFICIENCY PLANNING & OPERATIONAL VARIANCE

Labour cost planning variance
a. Labour rate planning variance
b. Labour efficiency planning variance
Labour cost operational variance
a. Labour rate operational variance
b. Labour efficiency operational variance

H A A A R SA

R A R S S S

Labour rate Labour rate Labour efficiency Labour efficiency

Operational Variance planning variance operational variance planning variance
Planning variance in sales price variances
Operational sales price variance
Refer to the difference between the Actual selling price and revised selling price multiplied by the Actual
quantity.
(AP – RP) X AQ
ASP = Actual selling price
RSP = revised selling price
AQ = Actual quantity sold
Planning sales price variance
Refer to the difference between the Revised selling price and standard selling price (RSP – SSP) X AQ
RSP = Revised selling price
SSP = Standard selling price
AQ = Actual quantity sold

Q A A A A S

Mix A A A S S

P A R S S S

sales price sales price

operational planning Sales mix variance Sales yield/ quantity
variance variance variance
MARKET SHARE VARINCE AND MARKET SIZE VARIANCE
Market shares variance shows the impact of a change in market share on the profits of a business in
can be critical when evaluating the marketing and other costs that will be incurred to create and
maintain an increase in market share. If the marketing cost is not excessively

Market share = APM% – BPM% X AMS - BMS X Average Budgeted

Variance Contribution margin
APM= Actual percentage Market share
BPM = Budgeted Percentage Market share
AMS = Actual Market Share in units
BMS = Budgeted Market Share in units
ABCM = Average Budgeted Contribution margin

Market size variances = BPM% X AMSz - BMSz X Average Budgeted

Contribution margin
BPM =Budgeted percentage market share
AMSz = Actual Market size units
BMSz = Budgeted Market size in units
ABCM = Average Budgeted contribution margin

INVESTIGATION OF COST VARIANCE

Managers always face the dilemma as to whether a variance is worth investigating or not. The reason
for the same is that the act of investigation involves time and money. In deciding when should variance
be investigated, statistical tools like trend analysis, control charts, decision tree approach and cost and
benefit analysis etc. should be used. An investigation of variances should be undertaken only if the
benefits expected from investigation exceed the cost of investigation and cost of taking remedial
measures. Further, behavioural aspects should also be taken into consideration, e.g. if no investigation
is made to locate the causes of variances and no remedial measures taken, it may adversely affect the
behaviour of the workers and their motivation to achieve the desired results. The following example
illustrates the cost benefit analysis of investigation of variances.
Factors to be considered when deciding which variances to investigate, the following factors
should be considered
1. Reliability and accuracy of the figures.
Mistakes in calculating budget figures, or in recording actual costs and revenues, could lead to
a variance being reported where no problem actually exists (the process is actually ‘in control’).

2. Materiality. The size of the variance may indicate the scale of the problem and the potential
benefits arising from its connection.

3. Possible interdependence of variances. Sometimes a variance in one area is related to a

variance in another. For example, a favourable raw material price variance resulting from the
purchase of a lower grade of material may cause an adverse labour efficiency variance
because the lower grade material is harder to work with. These two variances would need to be
considered jointly before making an investigation decision.

4. The inherent variability of the cost or revenue. Some costs, by nature, are quite volatile (oil
price, for example) and variance would therefore not be surprising. Other costs, such as labour
rates, are far more stable and even a small variance may indicate a problem.

5. Adverse or Favourable? Adverse variances. Tend to attract most attention as they indicate
problems. However, there is an argument for the investigation of favourable variances so that a
business can learn from its success.

6. Trends in variance. One adverse variance may be caused by a random event. A series of
adverse variances usually indicates that a process is out of control.

7. Controllability / Probability of correction. If a cost or revenue is outside the manager’s

control (such as the world market price of a raw material) then there is little point in
investigation its cause.

8. Costs and benefits of correction. If the cost of correcting the problem is likely to be higher
than the benefits, then there is little point in investigating further.
QUESTION 01
The production manager of ABC Ltd. Expects that there might be 0.4 probability that the material usage
variance is controllable. The cost of investigation of variance is estimated to be £1,500 and further
£2,000 would be required to take corrective action. Calculate the minimum expected benefits from
control action to justify the investigation of material usage variance.
The investigation of variance shall be justified if the expected benefits arising from control action (after
deducting cost of corrective measures) at least equal to the costs of investigation of variance.
If X is equal to the minimum expected benefits after deducting costs of remedial action then 0.4 should
be equal to £1,500
0.4X = £1,500
X = £1,500 X 10/4
= 3,750
Therefore, minimum expected benefits from control action after deducting control costs of £2,000
should be at least £ 3,750 or £5,750 before deducting cost of taking corrective measures.

Controllable (0.40)
Costs £1,500

(0.60)

Investigate

Do not investigate

Decision tree (Approach)

No Cost
 QUESTION 02
Machine Produces 100,000 standard components per day at a cost of £1.50 per unit. If the
process is in control, on an average of 3% of the output is defective. If the process is out of
control, the rate of defective will be 5%. The entire cost of a defective unit is a loss. The cost of
carrying out an investigation is £600. If the process is found to be out of the control after an
investigation then it costs another £400 to rectify the error. The probability of the process being
in control is 0.70. Should an investigation be made or not.

SOLUTION 02

Process in control Process out of control

Probability 0.70 Probability 0.30
Cost of investigated £600 £600 + £400 = £1,000
Cost if not investigated - £1.50 X 2,0001 = £3,000

If the process is out of control the extra defectives shall be (5% - 3%) of 100,000 components.
i.e. 2,000.
Thus, the expected cost if investigation is made = (£600 X 0.70) + (1000 X 0.3) = £720
And, the expected cost if investigation is not made = (0.3 X 3,000) = £900. As, the expected
cost in case of investigation is less than if not investigated, it is advised that the investigation
should be made.

IDLE TIME VARIANCES

This is the variance determined almost on the line of calendar variance. It is that part of volume variance
which is due to difference between budgeted fixed overhead and fixed overhead four hours available
during the period at standard rate. This variance arises due to difference between hours as per budgeted
and hour available in the period, to which budget is applied. It is necessary to understand the difference
between calendar variance and idle time variances. For computational purposes, both will represent the
number of days as per budgeted and number of days available during the period.

Labour idle time variance

This is the difference between the hours budgeted for work and the number of paid hours not spent
working (idle time). For example, if an employee of a company were budgeted to make products for
8,000 hours, but only did work for 7,800 hours, then 200 hours were spent in idle time.This is normally
calculated by multiplying the wage rate and idle time
QUESTION 01
Suppose wage rate is Tshs 7.6, paid hours by an organisation were 100 hours, but labour worked
under 95 hours, here idle time is 5 hours
Total cost paid for idle time = 5 hours X 7.6
= TSHS 38

QUESTION 02
Cost data for 1993
Budget Actual
Fixed overhead (Rs) 96,000 (yearly) 8,500 (monthly)
Working days 300 (yearly) -
Production (units) 24,000 (yearly) 2,100 (monthly)
RECONCILING BUDGETED PROFIT AND ACTUAL PROFIT
£ £ £
BUDGETED PROFIT XXXX
Sales variances
Sales margin price variance xxxx
Sales margin volume variance xxxx xxxx
Less cost
Direct material price variance xxxx
Direct material usage variance xxxx xxxx
Direct labour rate variance xxxx
Direct labour efficiency variance xxxx xxxx
Manufacturing overhead variance:
VOH-Expenditure variance xxxx
VOH-Efficiency variance xxxx xxxx
Fixed overhead variance:
FOH-Expenditure variance (Note 1) xxxx
FOH-Volume variance (Note 2) xxxx xxxx (xxxx)
ACTUAL PROFIT XXX
NOTE
Note 1- For variable costing this variance will be used only
Note 2- For absorption costing this variance is added
 DEPARTMENTAL PERFORMANCE REPORT
Department………………………… Actual production 27,000
Period………………………………. Actual working hours 28,500
Budgeted hours 30,000
Control ratios: Efficiency ………. Capacity ……… Volume ……….

DIRECT MATERIALS
Type Standard quantity Actual quantity Difference Standard price Usage Reasons
Variance
A ………….. ………………… …………… …………… …………. …………..
B ………….. ………………… …………... …………… …………. …………..

DIRECT LABOUR
Grade Standard Actual Standard Actual Total Analysis Reasons
Hours Hour Difference Cost Cost Variance Efficiency Rate

OVERHEADS Allowed Actual Expenditure Reason Variable overhead

Cost Cost Variance efficiency variance
Controllable costs (variable) (hours) (£)
Indirect labour Difference
Power between
Maintanance standard
Indirect materials hours and
Actual hours
At XX per hour
Total

Uncontrollable costs (fixed)

Lighting and heating
Depreciation
Supervision
 Variance (£) Variance as a % of standard cost

SUMMARY This month cumulative This month cummulative

(£) (£) (%) (%)

Direct materials
Direct labour:
Efficiency
Wage rate
Controllable overhead:
Expenditure
Variable overhead efficiency
Total

Comments:

NOTE:

Production volume Ratios = Standard hours of actual output X 100

Budgeted hours of output

Control Ratios/ Efficiency Ratios = Standard hours for actual output X100
Actual hours worked

Capacity Ratios = Actual hours X 100

Budgeted hours
CONCEPT OF PROCESS COST ACCOUNT
All debited
a. Opening work in progress
b. Process costs
c. All favourable
All credited
a. Closing work in progress
b. Transferred out products
c. All adverse variance
 STANDARD COSTING AND VARIANCES
PERFORMANCE MANAGEMENT (B5)

1,000 GOALS
SOLVING PROGRAM
DIRECTED BY: MUDDY

Prepared by:

MOHAMED HUSSEIN MWINYI

CORNERSTONE FINANCIAL CONSULTANTS

PHONE: 0623335055/0658209400

VENUE: MAKUMBUSHO AND YMCA

TIME: 03:00 AM TO 20:30 PM at Makumbusho

TIME: 17:30 pm to 20:30pm at YMCA

QUESTION 01

CIMA ADOPTED

The following budget and actual data was obtained for chocolate Heaven’s sales of Organic chocolate
for the second six months of 2014:

Budget Quantity Selling price Standard cost Gross profit

Milk 65,000 GBP 40.60 GBP 22.40 GBP 18.20
White 44,000 GBP 40.90 GBP 19.20 GBP 21.70
Dark 26,000 GBP 41.40 GBP 24.30 GBP 17.10
135,000

Actual Quantity Selling

Milk 71,000 GBP 40.62
White 41,000 GBP 40.89
Dark 25,000 GBP 41.38
137,000

Market data Budget Actual

Organic chocolate 1,250,000 1,290,000

Prepare profit reconciliation from the above data that provides a detailed insight into the company’s
sales for the second six months of 2014.
Note calculate
a. sales price
b. market size
c. market share and sales mix variances
QUESTION 02
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard
cost card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0·25 10
Coconut oil 0·6 4
Shea butter 0·5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
Required:
Calculate the total material mix variance and the total material yield variance for September
QESTION 03
DRURY 3RD EDITION
Alpha manufacturing company produces a single product, which is known as sigma. The product
requires a single operation, and the standard cost for this operation is presented in the following
standard cost card:
Standard cost card for product sigma
(£)
Direct materials:
2kg of A at £1 per kg 2.00
1kg of B at £3 per kg 3.00
Direct labour (3 hours at £3 per hour) 9.00
Variable overhead (3 hours at £2 per direct labour hour) 6.00
Total Standard variable cost 20.00
Standard contribution margin 20.00
Standard selling price 40.00
Alpha Ltd plan to produce 10,000 units of sigma in the month of April, and the budgeted costs based on
the information contained in the standard cost card are as follows:
Budget based on the above standard costs and an output of 10,000 units
(£) (£)
(£)
Sales (10,000 units of sigma at £40) 400,000
Direct materials:
A: 20,000 kg at £1 per kg 20,000
B: 10,000 kg at £3 per kg 30,000 50,000
Direct labour (30,000 hours at £3 per hour) 90,000
Variable overheads (30,000 hours at £2 per direct labour hour) 60,000 200,000
Budgeted contribution 200,000
Fixed overheads 120,000
Budgeted profit 80,000
Annual budgeted fixed overheads are £1,440,000 and are assumed to be incurred evenly throughout
the year. The company uses a variable costing system for internal profit measurement purposes.
The actual results for April are:
(£) (£)
Sales (9,000 units at £42) 378,000
Direct materials
A: 19,000 kg at £1.10 20,900
B: 10,100 kg at £2.80 per kg 28,280
Direct labour (28,500 hours at £3.20 per hour) 91,200
Variable overheads 52,000 192,380
Contribution 185,620
Fixed overheads 116,000
Profit 69,620
Manufacturing overheads are charged to production on the basis of direct labour hours. Actual
production and sales for the period were 9,000 units
Required
a. Calculate all variances
b. Comment on each variances obtained
c. Provide reasons for variances occurred
QUESTION 04
NBAA EXAM 1995
XYZ Ltd manufactures a single product, the standards of which are as follows:
Standard per unit: (£) (£)
Standard selling price 52
Less Standard cost
Material (5kg at £2 per kg) 10
Labour (4 hours at £4 per hour) 16
Variable overheads (4 hours at £1.50 per hour) 6 32
Standard contribution 20
Variable overheads are assumed to vary with direct labour hours
The following information relates to the previous month’s activities:
Budget Actual
Production and sales 2,000 units 1,800 units
Direct materials 10,000 kg at £2 per kg 10,000 kg at £2 per kg
Direct labour 8,000 hours at £4 per hour 8,000 hours at £4 per
hour
Variable overheads £ 12,000 £ 11,100
Fixed overheads £ 12,000 £ 12,000
Profit £ 28,000 £ 18,500
The actual selling price was identical with the budgeted selling price and there were no opening or
closing stocks during the period.
Required
Calculate
a. Material price variances
b. Material usage variances
c. Labour rate variances
d. Labour efficiency variances
e. Variable overhead variances
f. Fixed overhead variances
QUESTION 05
DRURY 3RD EDITION
Mingus Ltd produces granoids. It revises its cost standards annually in September for the year
commencing 1 December.
At a normal annual volume of output of 40,000 granoids its standard costs, including overheads, for the
year to 30 November 1981 were:
Cost Standard Per unit Total
(£) (£000)
Direct materials 5kg at £ 10 per kg 50 2,000
Direct labour 2hrs at £ 5 per hr 10 400
Variable overheads £ 1 per kg of direct material 5 200
Fixed overheads £ 5 per hr of direct labour 10 400
75 3,000
The actual expenditure incurred in that year to produce an actual output of 50,000 granoids was:
Cost Total expenditure further details
(£000)
Direct materials 2,880 320,000 kg at £9 per kg
Direct labour 540 90,000 hr at £6 per hr
Variable overheads 280
Fixed overheads 380
Required
a. Calculate all basic variances
QUESTION 06
ACCA ADOPTED
Valet Co is a car valeting (cleaning) company. It operates in the country of Strappia, which
has been badly affected by the global financial crisis. Petrol and food prices have increased
substantially in the last year and the average disposable household income has decreased by
30%. Recent studies have shown that the average car owner keeps their car for five years
before replacing it, rather than three years as was previously the case. Figures over recent
years also show that car sales in Strappia are declining whilst business for car repairs is on
the increase.
Valet Co offers two types of valet – a full valet and a mini valet. A full valet is an extensive
clean of the vehicle, inside and out; a mini valet is a more basic clean of the vehicle. Until
recently, four similar businesses operated in Valet Co’s local area, but one of these closed
down three months ago after a serious fire on its premises. Valet Co charges customers $50
for each full valet and $30 for each mini valet and this price never changes. Their budget and
actual figures for the last year were as follows:
Budget Actual
Number of valets: Full valets 3,600 4,000
Mini valets 2,000 3,980
$ $ $ $
Revenue 240,000 319,400
Variable costs: Staff wages (114,000) (122,000)
Cleaning materials (6,200) (12,400)
Energy costs (6,520) (126,720) (9,200) (143,600)
Contribution 113,280 175,800
Fixed costs: Rent, rates and depreciation (36,800) (36,800)
Operating profit 76,480 139,000
The budgeted contribution to sales ratios for the two types of valet are 44·6% for full valets
and 55% for mini valets.
Required: Using the data provided for full valets and mini valets, calculate:
(i) The total sales mix contribution variance
(ii) The total sales quantity contribution variance.
QUESTION 07
ACCA ADOPTED DECEMBER 2012
Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer.
All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer.
The standard cost of labour for each batch is $6·00 and the standard labour time for each
batch is half an hour. In November, Truffle Co had budgeted production of 24,000 batches;
actual production was only 20,500 batches. 12,000 labour hours were used to complete the
work and there was no idle time. All workers were paid for their actual hours worked. The
actual total labour cost for November was $136,800. The production manager at Truffle Co
has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the
choice of either accepting a 5% pay cut or facing a certain number of redundancies. All staff
subsequently agreed to accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change
was implemented immediately and made the chocolates more difficult to shape. When recipe
changes such as these are made, it takes time before the workers become used to working
with the new ingredient mix, making the process 20% slower for at least the first month of
the new operation.
The standard costing system is only updated once a year in June and no changes are ever
made to the system outside of this.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based
on the standard cost provided above. (4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts
for planning and operational variances in as much detail as the information allows. (8 marks)
(c) Assess the performance of the production manager for the month of November.
QUESTION 08
ACCA ADOPTED DECEMBER 2013
Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It
uses a just-in-time system and holds no inventories. The standard cost for the cotton which is
used to make the bed sheets and pillowcases is $5 per m2. Each bed sheet uses 2 m2 of cotton
and each pillowcase uses 0·5 m2. Production levels for bed sheets and pillowcases for
November were as follows:
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used
to make the bed sheets and 95,000 m2 was used to make the pillowcases. The world
commodity prices for cotton increased by 20% in the month of November. At the beginning
of the month, the hotel chain made an unexpected request for an immediate design change to
the pillowcases.
The new design required 10% more cotton than previously. It also resulted in production
delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues
which occur, although he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and
pillow cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)
(b) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)
QUESTION 09
ACCA JUNE 2013
Block Co operates an absorption costing system and sells three types of product – Commodity
1, Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block
Co is struggling to maintain revenues and profits in face of the economic recession which has
engulfed the country over the last two years. Sales prices fluctuate in the market in which Block
Cooperates. Consequently, at the beginning of each quarter, a market specialist, who works on
a consultancy basis for Block Co, sets a budgeted sales price for each product for the quarter,
based on his expectations of the market. This then becomes the ‘standard selling price’ for the
quarter. The sales department itself is run by the company’s sales manager, who negotiates the
actual sales prices with customers. The following budgeted figures are available for the quarter
ended 31 May 2013.
Product Budgeted production Standard selling price Standard variable
and sales units per unit production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28·40
Commodity 3 26,000 $41·60 $26·40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of
direct machine hours and the budgeted cost of these for the quarter ended 31 May 2013 was
$174,400. Commodity 1, 2 and 3 use 0·2 hours, 0·6 hours and 0·8 hours of machine time
respectively.
The following data shows the actual sales prices and volumes achieved for each product by
Block Co for the quarter ended 31 May 2013 and the average market prices per unit.
Product Actual production Actual selling price Average market price
and sales units per unit per unit
Commodity 1 29,800 $31 $32·20
Commodity 2 30,400 $34 $33·15
Commodity 3 25,600 $40·40 $39·10

The following variances have already been correctly calculated for Commodities 1 and 2:
Sales price operational variances:
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances:
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse

Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price
planning variance. (4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance
and the total sales quantity variance. (11 marks)
(c) Briefly discuss the performance of the business and, in particular, that of the sales manager
for the quarter ended 31 May 2013. (5 marks)
QUESTION 10
DRURY 3RD EDITION
A Company manufactures two products which have the following standard costs ( per
hundred units of output) for direct materials and direct labour:
Product 1:
98 kilos of Material M at £0.78 per kilo
10 hours in Department X at £4.20 per hour
Product 2:
33 kilos of Material N at £2.931 per kilo
9 hours in Department Y at £4.50 per hour.
The predetermined production overhead rates for the two departments are:
Department X: £3.60 per direct labour hour
Department Y: £2.90 per direct labour hour
The following incomplete information is provided of actual production, costs and variances
for the period:
Actual production:
Product 1: 42,100 units
Product 2: (vii) units
Actual costs:
Direct materials:
41,200 kilos of Material M at £0.785 per kilo = £32,342
(viii) Kilos of Material N at (ix) per kilo = £23,828
Direct labour:
4190 hours in Department X at £4.20 per hour = £17,598
(x) Hours in Department Y at £4.55 per hour = (xi)
Production overhead:
Department X £14,763
Department Y (xii)
Variances:
Material Material
Direct material M N
Price (i) £233A
Usage (ii) £5F
Total (iii) 228A

Department Department
Direct Labour: X Y
Rate (iv) (xiii)
Efficiency (v) £342F
Total (vi) £142A
Production overhead
N.B. A denotes an adverse variance
F denotes a favourable variance
REQUIRED
a. Calculate the standard costs of Product 1 and 2 ( £ per hundred units, to two decimal
places)
b. Calculate the missing cost variances (i) to (vi) relating to product 1 (to the nearest £).
c. Calculate the missing figures (vii) to (xiv) relating to product 2. (Calculate variances
and total costs to the nearest £; production, kilos, and hours to the nearest whole
number; and price per kilo to two decimal places to a £) This question adopted from
ACCA Level 1 – Cost and Management Account 1)
QUESTION 11
Shown below is the standard prime cost of a tube of industrial adhesive, which is the only
product, manufactured in one department of Gum plc.
Industrial adhesive
(£ per tube) (£ per tube)
Materials:
Powder 1.50
Chemical 0.60
Tube 0.30 2.40
Labour-Mix and Pouring 1.80
Total standard prime cost £4.20
The standard material allowance for each tube of adhesive is 2 lb of powder, ¼ litre of
chemical and one tube. The standard wage rate for mixing and pouring is £4.50 per hour.
During the previous month 4500 tube of adhesive were produced, there were no work in
progress stocks at the beginning or end of the month, and the receipts and issues of materials
during the month are shown below:
Powder Chemicals Tubes
Opening stock 1500 lb 200 litres 100 tubes
Purchases: 10,000 lb at £70p per lb 600 litres at £2.30 per litre 200 tubes at £40p
each
600 litres at £2.50 per litre 5000 tubes at £30p each
Issues: 9800 lb
1050 lb
4520 lb
The above materials are used exclusively in the production of the adhesive and it is the policy
of the Company to calculate any price variance when the materials are purchased.
The direct employees operating the mixing and pouring plant worked a total of 2050 hours
during the previous month and earned gross wage of £8910.
REQUIRED
a. Calculate for the previous month the following variances from the standard cost:
i. Material price variance (analysed as you consider appropriate)
ii. Material usage variance (analysed as you consider appropriate)
iii. Direct Labour efficiency variance
iv. Direct wage rate variance.
b. Discuss the possible causes of the material variances and the direct labour efficiency
variance.
QUESTION 12
ACCA MARCH/JUNE 2016
Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per
pair. The standard cost of labour for each pair is $42 and the standard labour time for each
pair is three hours. In the last quarter, Glove Co had budgeted production of 12,000 pairs,
although actual production was 12,600 pairs in order to meet demand. 37,000 hours were
used to complete the work and there was no idle time. The total labour cost for the quarter
was $531,930.
At the beginning of the last quarter, the design of the gloves was changed slightly. The new
design required workers to sew the company’s logo on to the back of every glove made and
the estimated time to do this was 15 minutes for each pair. However, no-one told the
accountant responsible for updating standard costs that the standard time per pair of gloves
needed to be changed. Similarly, although all workers were given a 2% pay rise at the
beginning of the last quarter, the accountant was not told about this either. Consequently, the
standard was not updated to reflect these changes.
When overtime is required, workers are paid 25% more than their usual hourly rate.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for the last quarter. (2
marks)
(b) Analyse the above total variances into component parts for planning and operational
variances in as much detail as the information allows. (6 marks)
(c) Assess the performance of the production manager for the last quarter. (7 marks)
QUESTION 13
NBAA NOVEMBER 2015
Umeme Company uses standard costing partly for departmental evaluation purposes. Prime
costs variances that were presented to the management for departmental evaluations purpose
were presented as follows:
PRICE/RATE VARIANCE EFFICIENCY VARIANCE
IN TZS IN TZS
Raw materials 280,000 adverse 96,000 adverse
Direct labour 58,000 adverse 240,000 favourable

When the meeting deliberations started, the new Management Accountant informed the
meeting that it was improper to evaluate the procurement and the factory performances based
on the traditional variances because these variances conceal a component that should be
attributed to planning errors. He said that when the planning variances are established, each of
the two departments becomes accountable for the planning variance component. His concern
was mainly spurred by the events that took place in the month ended, which must have
significantly rendered irrelevant all assumptions that were made at the time of setting standards
and budgets. He explained his concern as follows:
m. The standard for raw materials equal to TZS 160 per finished unit was based on the
understanding that each finished good would require 2 kilograms and each kilogram
would be purchased at TZS 80. The procurement manager purchased 140,000
kilograms at a total cost equal to TZS 11,480,000 because the type of raw material that
was targeted was not available. It has now been established that the prevailing price for
the type of raw material that the procurement manager purchased was TZS 81 per
kilogram. It has also been established that this raw material was of high quality and for
this reason, this should have reduced material usage by 2% of the quality that was
allowed per finished unit. The factory used 121,200 kilograms to produce 60,000
finished units.
ii. The standard for direct labour equal to TZS 12 per finished unit was based on the
assumption that each finished unit would require 0.01 labour hours and this would have
influenced an average rate equal to TZS 12,000 per hour. This did not take into account the
fact that some operations would require skilled labour whose rate per hour is higher than
the assumed average rate. If what has been said was considered, the average direct labour
rate should have been TZS 12,150 per hour. Apart from this, the mix of skilled and
unskilled labour would have as well increased labour efficiency by 4% of the hours that
were allowed per finished unit. In the period ended, total direct labour cost was TZS
7,018,000 and this was for 580 labour hours that were used for output of 60,000 finished
units that was achieved.
Management was impressed by this presentation and want you to decompose each variance
reported into the planning variance and operating variance.
REQUIRED
Using the information available, analyze each of the raw materials and direct labour
variances into the planning and operational variances.
QUESTION 14
JC Ltd mixes three materials to produce a chemical SGR. The following extract from a
standard cost card shows the materials to be used in producing 100 kg of chemical SGR:
Kg
Material A 50 @ $10 per kg
Material B 40 @ $5 per kg
Material C 20 @ $9 per kg
––––
110
––––
During October 23,180 kg of SGR were produced using the following materials:
kg
Material A 13,200
Material B 7,600
Material C 5,600
––––––
26,400
––––––
What is the total material mix variance?
A $1,984 A
B $7,216 A
C $9,200 A
D $16,416 A
QUESTION 15
CIMA ADOPTED (QUESTION 04-CIMA 2011)-SALES MIX
A company produces and sells DVD players and Blue-ray players. Extracts from the budget
for April are shown in the following table:
Sales Selling price Standard cost
(Players) (Per player) (Per player)
DVD 3,000 75 50
Blu-ray 1,000 200 105
The Managing Director has sent you a copy of an e-mail she received from the Sales
Manager. The content of the e-mail was as follows:
We had an excellent month. There was an adverse sales price variance on the DVDs of
18,000 but I compensated for that by raising the price of Blu-ray players. Unit sales of DVD
players were as expected but sales of the Blu-rays were exceptional and gave a total sales
volume profit variance of 19,000. I think I deserve a bonus!
The Managing Director has asked for your opinion on these figures. You obtained the
following information:
Actual results for April were:
Sales Selling price
(Players) (Per players)
DVD 3,000 69
Blu-ray 1,200 215
The total market demand for DVD players was as budgeted but as a result of distributors
reducing the price of Blu-ray discs the total market for Blu-ray players grew by 50% in April.
The company had sufficient capacity to meet the revised market demand for 1,500 units of its
Blu-ray players and therefore maintained its market share.
Required
(a) Calculate the following operational variances based on the revised market details:
(i) The total sales mix profit margin variance
(ii) The total sales volume profit variance

(b) Explain, using the above scenario, the importance of calculating planning and
operational variances for responsibility centres.
QUESTION 16
CIMA ADOPTED (QUESTION 04-CIMA 2011)
GRV is a chemical processing company that produces sprays used by farmers to protect their
crops. One of these sprays is made by mixing three chemicals. The standard material cost
details for 1 litre of this spray is as follows:
0.40 litres of chemical A @ 30 per litre 12.00
0.30 litres of chemical B @ 20 per litre 6.00
0.50 litres of chemical C @ 15 per litre 7.50
Standard material cost of 1 Litre of spray 25.50
During August GRV produced 1,000 litres of this spray using the following chemicals:
600 litres of chemical A costing 18,000
250 litres of chemical B costing 8,000
500 litres of chemical C costing 8,500
You are the management Accountant of GRV and the Production Manager has sent you the
following e-mail:
I was advised by our purchasing department that the worldwide price of chemical B had risen
by 50%. As a result, I used an increased proportion of chemical A than is prescribed in the
standard mix so that our costs were less affected by this price change.
Required
(a) Calculate the following operational variance
(i) Direct material mix and
(ii) Direct material yield

(b) Discuss the decision taken by the Production Manager

QUESTION 17
PBLSVG-S3-3-SERIES THREE
JC Limited produces and sells one product only, Product J, the standard cost for which is as
follows for one unit.
Direct material X 10 Kilogram at £20 200
Direct material Y 5 Kilogram at £6 30
Direct wages 5 hours at £6 30
Fixed Production overhead 50

Total standard cost 310

Standard Gross profit 90
Standard selling price 400

The fixed Production overhead is based on an expected annual output of 10,800 units
produced at an even flow throughout the year; assume each calendar month is equal. Fixed
Production overhead is absorbed on direct labour hours.
During April, the first month of the financial year, the following were the actual results for an
actual Production of 800 units.
Sales on credit:
800 units at £400 320,000
Direct materials:
X 7,800 Kilogram 159,900
Y 4,300 Kilogram 23,650
Direct wages: 4,200 hours 24,150
Fixed Production overhead 47,000 (254,700)
Gross Profit 65,300
The material price variance is extracted at the time of receipt and the raw materials stores
control is maintained at standard prices. The purchases, bought on credit, during the month of
April were:
X 9,000 Kilograms at £20.50 per kg from K Limited
Y 5,000 litres at £5.50 per litre from C plc.
Assume no opening stocks.
Wages owing for March brought forward were £6,000
Wages paid during April (net) £20,150.
Deductions from wages owing to the Inland Revenue for PAYE and NI were £5,000 and the
wages accrued for April were £5,000.
The fixed Production overhead of £47,000 was made up of expenses creditors of £33,000,
none of which was paid in April, and depreciation of £14,000.
The company operates an integrated accounting system.
You are required
(a)
(i) Calculate price and usage variances for each material,
(ii) Calculate labour rate and efficiency variances,
(iii) Calculate fixed Production overhead expenditure, efficiency and volume
variances.
(b) Show all the accounting entries in T accounts for the month of April – the work-in-
progress accounts is to be transferred to a Profit or Loss Account which you are also
required to show
(c) Explain the reasons for the difference between the actual gross profit given in the
question and the profit and loss account.
QUESTION 18
IBB-20
A company manufactures one product, and the entire product is sold as soon as it is produced.
Therefore is no opening or closing inventories and work in progress is negligible. The company
operates a standard costing system and analysis of variances is made every month.
The standard cost card for the product, a widget, is as follows:
STANDARD COST CARD – WIDGET
Direct materials 0.50 kilos at 4 per kilo 2.00
Direct wages 2 hours at 2.00 per hour 4.00
Variable overheads 2 hours at 0.30 per hour 0.60
Fixed overhead 2 hours at 3.70 per hour 7.40
Standard cost 14.00
Standard profit 6.00
Standard selling price 20.00
Budgeted output for January was 5,100 units. Actual results for January were as follows.
Production of 4,850 units was sold for 95,600
Materials consumed in production amounted to 2,300 kilos 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
Required
Calculate all variances and prepare an operating statement for January.
QUESTION 19
Northcliffe Feeds Ltd manufactures a standard animal feed.
The predetermined standards for the budget period Jan-March 2005 were set by management in
October 2004.
Standard hours per tonne of product 1.10
Standard direct labour rate per hour 8.50/=
Standard usage of material per tonne of product 1.2 tonnes
Standard price of material 70 per tonne
Research shows that in the quarter ended 31 March 2005 the prevailing market price of material had
been 71 per tonne. Since the budget was set the wage rate had increased to 8.75 per hour, national
pay award.
During the quarter modifications to plant and machinery shows that direct labour hours per unit should
be 1.05 per tonne of product and that standard usage would reduce to 1.175 tonnes per tonne of
product.
During the quarter ended 31 March 2005 activity and costs showed:
Actual production 15,400 tonnes
Raw materials used 16,555 tonnes
Actual cost of raw materials used 1,191,960
Actual direct labour cost 16,632 hours 143,035
Required
Calculate planning and operational variances
QIUESTION 20
(a) In analyzing variances it has been found that in most cases an adverse variance from one
standard is related directly to another favourable variance in the enterprises, you are required
to explain this phenomenon by giving two examples
(b) The Makongo Juu Food Manufacturing Company manufactures one food product called TAMU
and the production data for 1 week of TAMU is given below

Standard cost data:

Direct materials 10 units at shs 150 1,500
Direct wages 5 hours @ shs 400 2,000
Production overhead 5 hours @ shs 500 2,500
6,000

Other information is as follows

Other overheads may be ignored
Profit margin is 20% of sales price
Budgeted sales are shs 3,000,000

Actual data
Sales 2,988,000
Direct material 643,500
Direct wages 816,200

Analysis of variance adverse variance Favourable variance

Direct material Price 58,500
Usage 37,500
Direct material Rate 31,800
Efficiency 18,000
Production overheads Expenditure 20,000
Volume 37,500
Assume that the Production and sales achieved resulted in no changes of stock
Required: Calculate
(a) Actual output
(b) Actual profit
(c) Actual price per unit of material
(d) Actual rate per labour hour
(e) Amount of Production overhead incurred
(f) Amount of Production overhead absorbed
(g) Production overhead efficiency variance
(h) Selling price variance
(i) Sales volume profit variance
QUESTION 21
(ADOPTED FROM SULTAN CHAND)
Following information of Lucy & Co is given for December 1993.
Budgeted sales: Product A 500 units @ Rs 2-(standard cost Rs 1.75)
Product B 700 units @ Rs 1.50 (Standard cost Rs 1.30)

Actual sales:
Product A 560 units @ Rs 1.95 per unit
Product B 710 units @ Rs 1.40 per unit
Find out
(a) Sales Margin variance.
(b) Sales Margin Mix variance.
(c) Sales Margin Quantity variance.
(d) Total sales Margin variance.
(e) Sales margin volume variance.
QUESTION 22
In a chemical manufacturing company production is carried on batches. Details of standard input of
materials, labour overheads etc. are as follows:

Standard input of material per batch of 2,000 kg

A 60% of input @ 15 /kg
B 20% of input @ 20 /kg
C 20% of input @ 25 /kg
Labour 1,200 hours per batch @ £10 per hour
Variable overhead £2 per kg
Fixed overhead £50,000 per month
Selling price £50 per kg
Standard production per month 10 batches.There is no processing loss

Actual details for November 2003 were as follows:

Number of batches processed 8
Materials consumed A 5,000 kg £76,000
B 1,500 kg £30,000
C 1,500 kg £48,000
Labour engaged for 9,800 hours, wage paid 95,000
Variable overhead 15,000
Fixed overhead 52,000
The output for the month was sold @ £54 per kg
REQUIRED
(a) Budget profit for November 2003 and the actual profit made.
(b) Analysis of the variance in profit.
QUESTION 23
Carat plc, a premium food manufacturer, is reviewing operations for a three-month period of 2003. The
company operates a standard marginal costing system and manufactures one product, ZP, for which
the following standard revenue and cost data per unit of product is available:
Selling price $12.00
Direct material A 2.5 kg at $1.70 per kg
Direct material B 1.5 kg at $1.20 per kg
Direct labour 0.45 hrs at $6.00 per hour
Fixed production overheads for the three-month period were expected to be $62,500.
Actual data for the three-month period were as follows:
Sales and production 48,000 units of ZP were produced and sold for $580,800
Direct material A 121,951 kg were used at a cost of $200,000
Direct material B 67,200 kg were used at a cost of $84,000
Direct labour Employees worked for 18,900 hours, but 19,200 hours
were paid at a cost of $117,120.
Fixed production overheads $64,000
Budgeted sales for the three-month period were 50,000 units of Product ZP.
Required:
(a) Calculate the following variances:
Sales volume contribution and sales price variances
Material price, mix and yield variances
Labour rate, labour efficiency, and idle time variances:

(b) Suggest possible explanations for the following variances:

Material price, mix, and yield variances
Labour rate, labour efficiency and idle time variances.

(c) Critically discuss the types of standard used in standard costing and their effects on employee
motivation.
ACCA SEPT/DEC 2015
QUESTION 24
The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The production
process begins with workers weighing out ingredients on electronic scales and then placing them in a
machine for mixing. A worker then manually removes the mix from the machine and shapes it into loaves
by hand, after which the bread is then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and made
ready for sale. Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:
$
White flour 450 grams at $1·80 per kg 0·81
Wholegrain flour 150 grams at $2·20 per kg 0·33
Yeast 10 grams at $20 per kg 0·20
–––– ––––
Total 610 grams 1·34
–––– ––––
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual production was
only 950 units. The total actual quantities used and their actual costs were:
Kg $ per kg
White flour 408·5 1·90
Wholegrain flour 152·0 2·10
Yeast 10·0 20·00
––––––
Total 570·5
––––––
Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for the last
quarter. (7 marks)
(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE
MATERIAL YIELD variance could arise at OBC. (3 marks)
QUESTION 25
CIMA SEPTEMBER 2010
The following details show the direct labour requirements for the first six batches of a new
product that were manufactured last month:
Budget Actual
Output (batches) 6 6
Labour hours 2,400 1,950
Total labour cost $16,800 $13,650

The Management Accountant reported the following variances:

Total labour cost variance $3,150 favourable
Labour rate variance Nil
Labour efficiency variance $3,150 favourable

The Production Manager has now said that the forgot to inform the Management Accountant
that he expected a 90% learning curve to apply for at least the first 10 batches.
Required
(a) Calculate planning and operational variances that analyse the actual performance
taking account of the anticipated effect. (6 marks)
Note: The learning index for a 90% learning curve is -0.1520
(b) Explain the differences between standard costing and target costing (4 marks)
QUESTION 26
GRV is a chemical processing company that produces sprays used by farmers to protect their crops.
One of these sprays is made by mixing three chemicals. The standard material cost details for 1 litre of
this spray is as follows:
$
0.4 litres of chemical A @ $30 per litre $12.00
0.3 litres of chemical B @ $20 per litre $6.00
0.5 litres of chemical C @ $15 per litre $7.50
Standard material cost of 1 litre of spray $25.50

During August GRV produced 1,000 litres of this spray using the following chemicals:
600 litres of chemical A costing $18,000
250 litres of chemical B costing $8,000
500 litres of chemical C costing $8,500

You are Management Accountant of GRV and the Production Manager has sent you the following e-
mail:
I was advised by our Purchasing Department that the worldwide price of chemical B had risen by 50%.
As a result, I used an increase proportion of chemical A than is prescribed in the standard mix so that
our costs were less affected by this price change.
Required:
(a) Calculate the following operational variances: Direct Material mix and Material Yield.
(b) Discuss the decision taken by the Production Manager.
SOLUTION 26
(a)

Mix Variance
Standard Mix Actual Difference Price Variance
A 450 litres 600 litres +150 litres ($23.75 – $30) $937.50 A
B 337.5 litres 250 litres - 87.5 litres ($23.75 - $30) $546.875 F
C 562.5 litres 500 litres - 62.5 litres ($23.75 - $15) $546.875 A
$937.50 A
Mix variance – Alternative calculation
Standard Mix Actual Difference Price Variance
A 450 litres 600 litres +150 litres $30 $4,500 A
B 337.50 litres 250 litres - 87.5 litres $30 $2625 F
C 562.5 litres 500 litres - 62.50 litres $15 $937.50 F
937.50 A

Yield Variance
1,350 litres of input should yield 1,125 litres of output, but output was only 1,000 litres so there
is a shortfall of 125 litres.
125 litres of output at the revised standard direct material cost of $28.50 per litre of output =
$3,562.50

(b)
The Production Manager’s decision to substitute some of chemical B with chemical A to avoid
the increased cost caused by the worldwide price increase of chemical B has not been very successful
as is shown by the adverse operational cost variances.
There was a significant increase in the total output volume needed to produce 1,000 litres of output,
possibly because the mix of chemicals being used was no longer optimum. This may have caused the
adverse yield variance.
I addition, there was an adverse mix variance because a lower proportion of chemical C was used. It
seems that the Manager used chemical A instead of chemical B, but chemical A was originally the most
expensive chemical and cost as much per litre as the revised price of chemical B that it replaced.
The Production Manager has taken action to reduce the effect of the worldwide price increase of
chemical B, however, since the company has a separate purchasing department then it is they who are
responsible for the purchasing function and therefore they should be responsible for the effect of price
changes not the Production Manager.
Apart from the financial effects of the Manager’s decision there are number of other issues to be
considered. The manager may not have the authority to change the mix of the spray without consulting
the company’s chemical advisors. The alternative mix may not be as effective as a crop protector as
the original mix may even be harmful to the crops or to customers that consume them.
QUESTION 27

CIMA MAY 2011

A company produces and sells DVD players and Blu-ray players. Extracts from the budget for
April are shown in the following table:
Sales Selling price Standard cost
(Players) (Per players) (Per player)
DVD 3,000 $75 $50
Blu-ray 1,000 $200 $105

The Managing Director has sent you a copy of an e-mail she received from the Sales Manager. The
content of the e-mail was as follows:

We have had an excellent month. There was an adverse sales price variance on the DVDs of
$18,000 but I compensated for that by raising the price of Blu-ray players. Unit sales of DVD
players were as expected but sales of the Blu-rays were exceptional and gave a total sales volume
profit variance of $19,000. I think I deserve a bonus!

The Managing Director has asked for your opinion on these figures. You obtained the following
information:
Actual results for April were:
Sales Selling price
(Players) (Per player)
DVD 3,000 $69
Blu-ray 1,200 $215

The total market demand for DVD players was as budgeted but as a result of distributors reducing
the price of Blu-ray discs the total market for Blu-ray players grew by 50% in April. The company
had sufficient capacity to meet the revised market demand for 1,500 units of its Blu-ray players and
therefore maintained its market share.

Required:

(a) Calculate the following operational variances based on the revised market details:
(i) The total sales mix profit margin variance (2 marks)
(ii) The total sales volume profit variance (2 marks)
(b) Explain, using the above scenario, the importance of calculating planning and operational
variances for responsibility centres. (6 marks)
 SOLUTION 027
(a)

(i)
Actual sales Std Mix Difference Profit per unit Variance
DVD 3,000 2,800 +200 $48.33 – $25 $4,667 A
Blu-ray 1,200 1,400 -200 $48.33 - $95 $9,334 A
4,200 4,200 $14,000

The total sales minx profit margin variance is $14,000A

ALTERNATIVE METHOD:
Actual sales Std Mix Difference Profit per unit Variance
DVD 3,000 2,800 +200 $25 $5,000 F
Blu-ray 1,200 1,400 -200 $95 $19,000 A
4,200 4,200 $14,000 A
(ii) The sales volume profit variance relates only to Blu-ray players because the actual and revised
budget volumes of DVD players are the same.

Therefore the variance is 300 players X $95 = $28,500 A

(b)
The market size is not within the control of the sales manager and therefore variances caused by
changes in the market size would be regarded as planning variances. However, variances caused by
changes in the selling prices and consequently the selling price variances and market shares would be
within the control of the sales manager and treated as operating variances.
The market size variance compares the original and revised market sizes. This is unchanged for DVD
players so the only variance that occurs relates to the Blu-ray players and is:
500 players x $95 = $47,500 F
It is important to make this distinction because as can be seen from the scenario the measurement of
the manager’s performance is distorted if the revised market size is ignored. The favourable volume
variance of $19,000 referred to in the sales manager’s e-mail is made up of two elements, one of
which, the market size, is a planning variance which is outside their control. It is this that has caused
the overall volume variance to be favourable, and thus the manager is not responsible for the overall
favourable performance.
Calculation of standard cost of batch of 100 kg

Material A (600kg @ £ 15) 9,000

B (200kg @ £ 20) 4,000
C (200kg @ £ 25) 5,000 18,000
Labour (1,200 hours @ £ 10 12,000
Variable overhead (1,000 X 2) 2,000
Fixed overhead (50,000 X 1/10) 5,000
Total standard cost of batch 37,000
Calculate budgeted Profit per Batch and per month

Sales (1,000kg X £ 50)

Less: Standard cost of 1,000 kg (batch)
Budgeted Profit per batch
Budgeted Profit per month (13,000 X 10)
Budgeted Profit per unit (13,000 X 1/100)

Prepared by:
Mohamed Hussein Mwinyi
Bcom in Accounting (Hons), ATEC II, CPA (T), CISA (IP), ACCA (IP)

SOLUTIONS OF QUESTIONS
QUESTION 18
a. Standard Margin
Standard Margin = Standard selling price – Standard cost
Product A
= Rs 2.00 – Rs 1.75
= Rs 0.25
Product B
= Rs 1.50 – Rs 1.30
= Rs 0.20

b. Actual Margin
Actual Margin = Actual selling price – Standard cost
Product A
= Rs 1.95 – Rs 1.75
= Rs 0.20
Product B
= Rs 1.40 – Rs 1.30
= Rs 0.10
Actual Quantity to Standard Mix
Standard Quantity Actual Quantity Actual quantity to standard mix
Product A 500 560 (w1) 529
Product B 700 710 (w2) 741
Total Quantity 1,200 1,270 1,270

WORKINGS
W1. 500/1200 X 1270 = 529
W2. 700/1200 X 1270 = 741
Total 1,270

Apply matrix method

PRODUCT A
Q A A A S

560 560 529 500

Mix A A S S

P A 0.20 S 0.25 S 0.25 S 0.25

112 140 132.25 125

4.75
Sales Margin Price variance Sales Margin mix variance Sales yield/Quantity
Margin variance

PRODUCT B
Q A A A S
Mix A A S S

P A S S S

Sales Margin Price variance Sales Margin mix variance Sales yield/Quantity
Margin variance