Variance Revision - Lecture notes 1,2,3 PDF

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Question 1Greenfields Ltd manufactures cleaning products at its Balcatta plant. Unfortunately, during the recent floods, part of the company’s accounting records was destroyed.The company accountant has been able to gather the following data from the waterlogged files, and has asked you to help reco...

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Question 1 Greenfields Ltd manufactures cleaning products at its Balcatta plant. Unfortunately, during the recent floods, part of the company’s accounting records was destroyed. The company accountant has been able to gather the following data from the waterlogged files, and has asked you to help reconstruct the missing data.

Standard quantity per unit of output Standard price or rate per unit of input Actual quantity used per unit of output Actual price or rate per unit of input Actual output Direct material price variance Direct material quantity variance Total of direct material variances Direct labour rate variance Direct labour efficiency variance Total of direct labour variances

Direct Material ? $8 per kg ? $7 per kg 10,000 units $30,000 F ? $10,000 U -

Direct Labour ? ? 3.5 hours $21 per hour 10,000 units ? $100,000 F $ 65,000 F

All of the raw materials purchased during the period were used in production. Required: (a)

Calculate the following: (i) Standard quantity of direct material per unit of output. (ii) Standard quantity of direct labour per unit of output. (iii) Standard direct labour rate per hour. (iv) Actual quantity of direct material used per unit of output. (v) Direct labour rate variance.

(b)

Which managers are generally held responsible for the material price variance and the material quantity variance? Explain your answer.

(c)

Explain how standard costing systems can be used to control costs in a manufacturing department. DM quantity var = (AQ – SQ) SP

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

(i) $40,000U SQ

= (30,000 – SQ)$8 = 240,000 - $8.SQ = 25,000kg (1 mark)

SQ/ unit

= 25,000/10,000 = 2.50kg/Unit (1 mark) (Total: 2 marks)

(ii)

DL effic $100,000F SH = 40,000 hours (1/2 mark)

= (AH – SH) SR = (35,000 – SH) $20 SH/DLH = 4 hours per unit (1/2 mark) (Total: 1 mark)

(iii)

DL rate var $35,000U SR

= (AR – SR) AH = ( $21 – SR) 35,000 = $20/DLH (1 mark) (Total: 1 mark)

(iv)

Total DM variance DM price var DM qty var

= $10,000U = $30,000F = $40,000U (1 mark)

DM price variance $ 30,000 F PQ as PQ = AQ,

= (AP – SP) PQ = ($7 - $8)PQ = 30,000kg (1/2 mark) AQ = 30,000 KG (1/2 mark) AQ per unit =30,000/10,000 =3kg/Unit (1 mark) (Total: 3 marks)

Total DL var DL effic DL rate var

= $65,000F = 100,000F = $35,000U (1 mark for $ amount; 1 mark for U sign) (Total: 2 marks)

(v)

(b)

Production managers are generally held responsible for the material quantity variance because they make decisions that affect how materials are used in production. Purchasing managers are held responsible for the material price variance because they make the decisions that affect how much is paid for the materials purchased. (1/2 mark for identifying manager responsible (max 1 mark) + 1 mark for why (max 2 marks) = Max for 1(b): 3 marks)

(c)

Standard costs are the theoretical costs of purchasing material and producing a product. (1/2 mark) They provide a benchmark against which actual costs may be compared. (1/2 mark) They allow the calculation of variances. (1/2 mark)

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

Significant variances may be investigated to determine the cause of problems, or the source of positive variances. (1/2 mark) Corrections may be made to processes, and behaviours to help ensure that unfavourable variances do not reoccur, ( and favourable variances do happen again). Responsibility for certain variances is assigned to those departments or managers who are in the best position to influence performance in those areas.

Question 2

Gumnut Corporation produces containers of frozen food. During April, Gumnut produced 1,450 cases of food and incurred the following actual costs. Variable overhead Fixed overhead Actual labour costs (8,000 direct labour hours) Actual material costs (30,000 kilograms purchased and used) Standard cost and annual budget information are as follows: Standard costs per Case Direct labour (5 hours at $18) Direct material (20 kg at $2) Variable overhead (5 hours at $1.50) Fixed overhead (5 hours at $3) Total

$ 11,000 26,000 151,200 66,000

$ 90.00 40.00 7.50 15.00 $152.50

Annual Budget Information Variable overhead $150,000 Fixed overhead $300,000 Planned activity for year 100,000 direct hours Required: Calculate the following variances: a) b) c) d) e) f) g) h)

Direct material price variance Direct material quantity variance Direct labour rate variance Direct labour efficiency variance Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

labour

Direct-material price variance

= PQ(AP – SP) = 30,000($2.20* – $2.00) = $6,000 Unfavorable

*$2.20 = $66,000  30,000 Direct-material quantity variance

= SP(AQ – SQ) = $2.00(30,000 – 29,000*) = $2,000 Unfavorable

*29,000 lbs. = 1,450  20 lbs. per unit Direct-labour rate variance

= AH(AR – SR) = 8,000($18.90* – $18.00) = $7,200 Unfavorable

*$18.90 = $151,200  8,000 Direct-labour efficiency variance

= SR(AH – SH) = $18.00(8,000 – 7,250*) = $13,500 Unfavorable

*7,250 hours = 1,450 units  5 hours per unit Variable-overhead spending variance = actual variable overhead – (AH  SVR) = $11,000 – (8,000)($1.50) = $1,000 Favorable Variable-overhead efficiency variance

= SVR(AH – SH) = $1.50(8,000 – 7,250) = $1,125 Unfavorable

Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead = $26,000 – $25,000* = $1,000 Unfavorable

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

*$25,000 = $300,000 (annual)  12 months Fixed-overhead volume variance

= budgeted fixed overhead – applied fixed overhead = $25,000 – $21,750* = $3,250 (positive)†

*$21,750 = 1,450 units  $15.00 per unit †

Consistent with the discussion in the text, we choose not to interpret the volume variance as either favorable or unfavorable. Some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as "favorable."

Question 3 Williamsport Wheel and Axle, Inc. has an automated production process, and production activity is quantified in terms of process hours. The company uses a standard-costing system. The annual static budget for 20x6 called for 6,000 units to be produced, requiring 30,000 machine hours. The standard overhead rate for the year was computed using this planned level of production. The 20x6 manufacturing cost report follows:

WILLIAMSPORT WHEEL AND AXLE, INC. Manufacturing Cost Report For 20x6 (in thousands of dollars) Static Budget

Cost Item Direct Material: A42 aluminium…… S18 Steel alloy……. Direct Labour Assembler………… Grinder…………… Manufacturing Overhead: Maintenance……… Supplies…………… Supervision……….. Inspection………… Insurance…………… Depreciation………. Total Cost…………

Flexible Budget

30,000 Machine Hours

31,000 Machine Hours

32,000 Machine Hours

Actual Cost

$504.0 156.0

$520.8 161.2

$537.6 166.4

$540.0 166.0

546.0 468.0

564.2 483.6

582.4 499.2

574.0 500.0

48.0 258.0 160.0 288.0 100.0 400.0 $2,928.0

49.6 266.6 164.0 294.0 100.0 400.0 $3,004.0

51.2 275.2 168.0 300.0 100.0 400.0 $3,080.0

50.0 260.0 162.0 294.0 100.0 400.0 $3,046.0

The company’s controller develops flexible budgets for different levels of activity for use in evaluating performance. A total of 6,200 units were produced during 20x6, Accounting (Managerial Control) 301 Variance revision © Curtin Business School

requiring 32,000 machine hours. The preceding manufacturing cost report compares the company’s actual cost for the year with the static budget and the flexible budget for two different activity levels. REQUIRED: Compute the following amounts. For variances, indicate whether favourable or unfavourable where appropriate. Answers should be rounded to two decimal places when necessary. A.

The standard number of machine hours allowed to produce one unit of product.

Standard machine hours per unit

=

budgeted machine hours budgeted production

=

30,00 6,00

= 5 hours per unit

B.

The actual cost of direct material used in one unit of product.

Actual cost of direct material per unit

=

$540,000  $166,000 6,200 units

= $113.87 per unit (rounded) C.

The cost of material that should be processed per machine hour.

Standard direct-material cost per machine hour

=

$504,000  $156,0 30,000

= $22 per machine hour D.

The standard direct-labour cost for each unit produced.

Standard direct-labour cost per unit E.

=

$546,000  $468,000  $169.00 peruni 6,000 units

The variable-overhead rate per machine hour in a flexible-budget formula. (Hint: Separate the overhead costs from direct material and direct labour, and then use the high-low method to estimate cost behaviour.)

(3 marks) Standard variable-overhead rate per machine hour

=

$1,294,400 - $1,254,000$40,40  32,000 - 30,000 2,000 hour

= $20.20 per machine hour

F.

The standard fixed-overhead rate per machine hour used for product costing. First, continue using the high-low method to determine total budgeted fixed overhead as follows: Total budgeted overhead at 30,000 hours......................................... $1,254,000 Total budgeted variable overhead at 30,000 hours (30,000  $20.20). 606,000 Accounting (Managerial Control) 301 Variance revision © Curtin Business School

Total budgeted fixed overhead........................................................

$ 648,000

The key is to realize that fixed overhead includes not only insurance and depreciation, but also the fixed component of the semivariable-overhead costs (supervision and inspection). (Note that maintenance and supplies are true variable costs.) Now, we can compute the standard fixed-overhead rate per machine hour, as follows:

Standard fixed-overhead rate per machine hour

=

$648,00 30,000 hour

= $21.60 per hour G.

The variable-overhead spending variance. (Assume management has determined that the actual fixed overhead cost in 20x6 amounted to $648,000.) First, compute actual variable overhead as follows: Total actual overhead..................................................................... $1,266,000 Total fixed overhead (given)........................................................... 648,000 Total variable overhead.................................................................. $ 618,000 Variable-overhead spending variance

=

Actual variable overhead – (AH  SVR)

=

$618,000 – (32,000  $20.20)

=

$28,400 Favorable

H. The variable-overhead efficiency variance. Variable-overhead efficiency variance =

(AH  SVR) – (SH  SVR)

=

(32,000  $20.20) – (31,000*  $20.20) = $20,200 Unfavorable

*Standard allowed machine hours = 6,200 units  5 hours per unit

I. The fixed-overhead budget variance. Fixed-overhead budget variance

J.

=

actual fixed overhead – budgeted fixed overhead

=

$648,000 – $648,000 = 0

The fixed-overhead volume variance. [Make the same assumption as in requirement (G).] K. Fixed-overhead volume variance =

budgeted fixed overhead – applied fixed overhead

=

$648,000 – (31,000  $21.60) = $21,600 (negative sign)*

*Consistent with the discussion in the text, we choose not to interpret the volume variance as either favorable or unfavorable. Some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as Accounting (Managerial Control) 301 Variance revision © Curtin Business School

"favorable." Question 4 The Mancusco Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. Its normal-costing system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labour – both variable) and two indirect – cost categories variable manufacturing overhead and fixed manufacturing overhead, both allocated using direct manufacturing labour – hours). At the 40,000 budgeted direct manufacturing labour-hour level for August, budgeted direct manufacturing labour is $800,000, budgeted variable manufacturing overhead is $480,000, and budgeted fixed manufacturing overhead is $640,000. The following actual results are for August: Direct materials price variance (based on purchases) $176,000 F Direct materials efficiency variance 69,000 U Direct manufacturing labour costs incurred 522,750 Variable manufacturing overhead flexible-budget variance 10,350 U Variable manufacturing overhead efficiency variance 18,000 U Fixed manufacturing overhead incurred 597,460 Fixed manufacturing overhead spending variance 42,540 F The standard cost per pound of direct materials is $11.50. The standard allowance is three pounds of direct materials for each unit of product. During August 30,000 units of product were produced. There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per pound. In July, labour unrest caused a major slowdown in the price of production, resulting in an unfavourable direct manufacturing labour efficiency variance of $45,000. There was no direct manufacturing labour price variance. Labour unrest persisted into August. Some workers quit. Their average wage rate in August exceeded the standard average wage rate by $0.50 per hour. REQUIRED: A.

Compute the following for August: (i) Total pounds of direct materials purchased $176,000 ÷ $1.10 = 160,000 pounds (ii) Total pounds of excess direct materials used $69,000 ÷ $11.50 = 6,000 (iii) Variable manufacturing overhead spending variance $10,350 – $18,000 = $7,650 F (iv) Total number of actual direct manufacturing labour-hours used Standard direct manufacturing labour rate= $800,000 ÷ 40,000 hours = $20 per hour Actual direct manufacturing labour rate= $20 + $0.50 = $20.50 (1 mark) Actual direct manufacturing labour-hours= $522,750 ÷ $20.50 = 25 500 hours

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

(v) Total number of standard direct manufacturing labour-hours allowed for the units produced Standard variable manufacturing overhead rate = $480,000 ÷ 40,000 = $12 per direct manuf. labour-hour Variable manuf. overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hours Actual hours – Excess hours = Standard hours allowed 25,500 – 1,500 = 24,000 hours (1 mark) (vi) Production-volume variance Budgeted fixed manufacturing overhead rate= $640,000 ÷ 40,000 hours = $16 per direct manuf. labour-hour (1 mark) Fixed manufacturing overhead allocated = $16  24,000 hours = $384,000 (1 mark) Production-volume variance = $640,000 – $384,000 = $256,000 U (1 mark)

B.

Describe how Mancusco’s control of variable manufacturing overhead items differs from its control of fixed manufacturing overhead items. (5 marks) The control of variable manufacturing overhead requires the identification of the cost drivers (1 mark) for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one (1 mark). Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item (1 mark). Individual fixed overhead items are not usually affected very much by day-today control (1 mark). Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have planning horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment). (1 mark)

Accounting (Managerial Control) 301 Variance revision © Curtin Business School

Question 5

Eastern Company manufactures special electrical equipment and parts. The firm uses a standard cost system with separate standards established for each product. The transformer department manufactures a special transformer. This department measures production volume in direct labour-hours and uses a flexible budget system to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer at its DeCatur plant for the year just completed is $67 per unit, as shown here: Direct materials Iron Copper Direct labour Variable overhead Fixed overhead Total

5 sheets X $2 3 spools X $3 4 hours X $7 4 hours X $3 4 hours X $2

$10 9 28 12 8 $67

Overhead rates were based on normal and expected monthly capacity for the year, both of which were 4,000 direct labour hours. Practical capacity for this department is 5,000 direct labours per month. Variable overhead costs are expected to vary with the number of direct labour-hours actually used. During October the plant produced 800 transformers. This number was below expectations because a work stoppage occurred during labour contract negotiations. When the contract was settled, the department scheduled overtime in an attempt to reach expected production levels. The following costs were incurred in October: Direct Material Iron Purchased 5,000 sheets at $2.00/sheet and used 3,900 sheets Copper

Purchased 2,200 spools at $3.10/spool and used 2,600 spools

Direct Labour Regular time:

2,000 hours at $7.00 and 1,400 hours at $7.20

Overtime: 600 of 1,400 hours were subject to overtime premium. The total overtime premium of $2,160 is included in variable overhead in accordance with company accounting practises. Question Five (continued)

Factory Overhead Variable $12,000 Accounting (Managerial Control) 301 Variance revision © Curtin Business School

Fixed REQUIRED:

$ 8,800

A.

What is the most appropriate time to record any variance of actual materials prices from standard? At the time of purchase. B. What is the direct labour rate variance? Total actual direct labour cost= 2,000 x $7 + 1,400 x $7.20 = $24,080 Total actual hours at the standard hourly rate= 3,400 x $7 = 23,800 Direct labour rate (price) variance $ 280U C. What is the direct labour efficiency variance? Total actual direct labour hours at standard wage rates 3,400 x $7 = $23,800 Total standard direct labour cost for units manufactured 22,400 Direct labour efficiency variance $ 1,400 U D.

What is the total direct materials price variance?

E.

What is the total direct materials quantity variance?...