Questions:
- Direct materials price and quantity (Efficiency) variances
- Direct labour rate and efficiency variances
- Variable overhead spending and efficiency variances
- Fixed overhead spending and production volume variances
2. Discuss your results and provide Rafael with recommendations on whether some of the variances should be investigated further.
Answers:
Answer 1
Answer i:
Direct Materials Price and Quantity (Efficiency) Variances
Materials | |
Actual price | 4.6 |
Standard Price | 4.5 |
Quantity Purchased | 25000 |
Material Price Variance | 2500 |
Material Quantity (Efficiency) Variance | |
Actual Quantity Used for Actual Output | 23100 |
Standard Quantity allowed for Actual Output | 25000 |
Standard Price | 4.5 |
Material Quantity (Efficiency) Variance | -8550 |
Working Notes
Material Price Variance
= (4.6 – 4.5) = 0.1
= 25,000 x 0.1 = 2500
Material Quantity Variance
= 23100 – 25000 = (1900)
= (1900) x Standard price
Or (1900) x 4.5 = (8550)
Answer ii:
Direct Labour Rate and Efficiency Variances
Labour | |
Labour Rate Variance | |
Actual Labour Price Per hour | 14.6 |
Standard labour price per hour | 15 |
Actual Hours use | 40100 |
Labour Rate Variance | -16040 |
Labour Efficiency Variance | |
Actual Hours for actual output | 40100 |
Standard hours for actual output | 40000 |
Standard Price | 4.5 |
Labour Efficiency Variance | 450 |
Working Notes:
Labour Variance
Actual labour price per hour – Standard Labour price per hour
= 14.6 – 15 = (0.4)
= (0.4) x Actual Hours Used
Or (0.4) x 40100 = (16040)
Labour efficiency variance:
Actual hours for actual output – Standard hours for actual output x Standard Price
= (40100 – 40000) x 4.5
= 450
Answer iii:
Variable Overhead Spending and Efficiency Variance:
Variable Overhead | |
Variable Overhead Spending Variance | |
Actual Variable Overhead Costs | 119000 |
Standard variable overhead rate | 3 |
Actual volume of allocation base | 25000 |
44000 | |
Variable Overhead Efficiency Variance | |
Actual volume of allocation base | 23100 |
Standard Volume of allocation base for output | 25000 |
Standard variable overhead rate | 3 |
Variable Overhead Efficiency Variance | -5700 |
Working Notes
Variable overhead spending variance:
Actual variable overhead costs – (Standard variable overhead rate x actual volume of allocation base)
= 119000 – (3 x 25000)
= 44,000
Variable overhead efficiency variance
Actual volume of allocation base – Standard volume of allocation base x Standard variable overhead rate
= 23100 – 25000 x 3 = (5700)
Answer to iv:
Fixed Overhead Spending and Production Volume Variance
Fixed Overhead | |
Fixed overhead spending variance | |
Actual Fixed overhead costs | 180000 |
Estimated fixed overhead costs | 160000 |
Fixed overhead spending variance | 20000 |
Fixed overhead volume variance | |
Estimated volume of allocation base | 8000 |
standard volume of allocation base for output | 7800 |
standard fixed overhead allocation rate | 20 |
Fixed overhead volume variance | 4000 |
Working Notes
Fixed overhead spending variance
= Actual Fixed overhead cost – Estimated fixed overhead costs
= 180,000 – 160,000
= 20,000
Fixed overhead volume variance
Estimated volume of allocation base – Standard volume of allocation base for output x standard fixed overhead allocation rate
= (8000 – 7800) x 20
= 4,000
Answer 2:
As evident from the current situation the material price variance reflected a favourable situation as the material price variance stood 2500. The material quantity efficiency variance reported an unfavourable efficiency variance -8550. Under the labour variance the labour rate variance stood -16040. While the labour efficiency variance favourably stood 450. The variable quantity overhead stood 44000 for the year while the variance overhead efficiency variance stood unfavourably to (5700). The fixed overhead spending variance stood favourably to 20000 while the fixed overhead volume variance stood 4000.
As evident from the above stated computations an assertion can be bought forward by stating that the material quantity variance for the company stood negatively which significantly requires an effort to be understand the cause of unfavourable amount of actual quantity that was used on the actual output. It can be stated that there were also the instances of labour rate variance as the variance stood negatively to 16040. The company is required to look into the primary reason for the such cause of unfavourable variances and investigate unfavourable situation to take into the account the causes of variance. Additionally, the variable overhead efficiency variance stood negatively to -5700 therefore it is recommended that the variances should be invested further by Rafael to understand the major cause of such deviation.
Reference List:
Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.
Lanen, W., 2016. Fundamentals of cost accounting. McGraw-Hill Higher Education.