Revision Tutorial Questions and Answers PDF

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Revision Tutorial Questions and Answers...

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Revision Tutorial Questions

Break Even Question The summarised budgeted profit statement of Sway Ltd for its next financial year when it expects to be operating at 80 per cent of capacity is as follows £

£

Sales (40,000 units @ £20)

800,000

Direct materials

240,000

Direct wages

160,000

Fixed production overheads

100,000

Variable production overheads

40,000 540,000

Gross Profit

260,000

Administration overheads (Fixed)

189,800

Selling overheads (Variable)

80,000 269,800

Profit/(loss)

(9,800)

(a) Calculate the break-even point in units and in revenue. (b) It has been estimated that if the selling price per unit were reduced by 5%, the increased demand would utilise 95% of the company’s capacity; you are required to redraft the statement using a marginal format to show the effect. (c) It has been estimated that if the selling price remains at £20/unit but improved materials were used that cost 20% per unit more, this improvement in the quality of the product would lead to increased demand utilising 100% of the company’s capacity; you are required to re-draft the statement using a marginal format to show the effect.

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Variances Question Durham Dynamic Ltd has the following standard cost for producing 1 unit of its only product:

Direct materials Direct labour Variable overheads

£ 90 66 30 186

5kg at £18/kg 6hrs at £11/hr 6hrs at £5/hr

The standard selling price is £210 per unit. The budgeted sales volume for May was 2,250 units In addition there were fixed overheads budgeted to be £100,000 The actual cost for producing 1 unit for May were:

Direct materials Direct labour Variable overheads

£ 90.75 73.5 40.25 204.5

5.5kg at £16.5/kg 7hrs at £10.5/hr 7hrs at £5.75/hr

The actual selling price was £205 per unit. The actual sales volume for May was 2,400 units The actual fixed overheads were £115,000 Required Calculate the following variances for May stating clearly whether they are adverse or favourable and suggest possible reasons for the variances you have calculated. Sales volume and sales price variances Material price and usage variances Labour rate and efficiency variances Variable overhead expenditure and efficiency variances Fixed overhead expenditure variance

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Revision Tutorial Answers

Break Even Answer (a) Calculation of contribution per unit:

Sales price Direct materials Direct wages Variable production overheads Variable selling overheads Contribution

Per unit 20 6 4 1 2 7

240,000/40,000 160,000/40,000 40,000/40,000 80,000/40,000

or contribution per unit = (800,000-240,000-160,000-40,000-80,000)/40,000 = 7 Break even in units = Fixed Costs/contribution per unit = 289,800/7 = 41,400 units Break even in revenue 41,400 x 20 = £828,000 (b) 80% capacity = 40,000 units 100% capacity = 40,000/0.8 = 50,000 units. Therefore 95% capacity = 50,000 x 0.95 = 47,500 units New sales price per unit 20 x 0.95 = £19/unit Sales

(19 x 47,500)

902,500

Direct materials

(6 x 47,500)

285,000

Direct wages

(4 x 47,500)

190,000

Variable production overheads

(1 x 47,500)

47,500

Variable selling overheads

(2 x 47,500)

95,000

Contribution

(6 x 47,500)

285,000

Fixed overheads

289,800

Profit/(loss)

(4,800)

(or rather than using the variable cost per unit as above, multiply the total variable costs at the 40,000 units activity level by 47,500/40,000 eg for direct materials 47,500/40,000 x 240,000 = 285,000)

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(c) New direct material cost per unit = 6 x 1.2 = £7.2/unit Total Sales

(20 x 50,000)

1,000,000

Direct materials

(7.2 x 50,000)

360,000

Direct wages

(4 x 50,000)

200,000

Variable production overheads

(1 x 50,000)

50,000

Variable selling overheads

(2 x 50,000)

100,000

Contribution

(5.8 x 50,000)

290,000

Fixed overheads

289,800

Profit/(loss)

200

Variances Answer Sales Volume and Sales Price variances Standard contribution per unit 210-186= £24 per unit Sales volume variance

24 x (2400 – 2250)

= £3600 favourable

Sales price variance

2400 (205 - 210)

= £12000 adverse

Material Price and usage variance

Price variance

Usage variance

Should cost (5.5x2400) x 18 237600 -

Did cost (5.5x2400)x16.5 217800 = £19800 favourable

Should use - Did use (2400 x 5 - 2400x5.5) x 18 (12000 – 13200) x 18

= £21600 adverse

Labour Rate and Efficiency variances

Rate variance

Should cost - Did cost (7x 2400)x11 - (7x2400)x10.5 184800

-

176400

Should take - Did take 4

= £8400 favourable

Efficiency variance

(6 x 2400 - 7x2400) x 11 (14400 - 16800) x 11

= £26400 adverse

Variable Overhead Expenditure and Efficiency variances

Expenditure variance

Efficiency variance

Should cost - Did cost (7x2400) x 5 - (7x2400) x 5.75 84000

-

96600

Should take

-

Did take

(6x2400 (14400

= £12600 adverse

- 7x2400) x 5 - 16800) x 5

= £12000 adverse

Fixed Overhead expenditure variance Budget overhead – Actual overhead 100000

- 115000

= 15000 adverse

Possible reasons for the variances

Sales volume

increased marketing spend/lower price

Sales price

price reduction to increase volumes

Material price

cheaper materials/unexpected discount

Material usage

poorer quality materials/Theft

Labour rate

less skilled workforce (cheaper)

Labour efficiency

less skilled workforce (less efficient)

Variable overhead expenditure

cost of power increase

Variable overhead efficiency

less skilled workforce so power on for longer

Fixed overhead expenditure

unexpected rent increase

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