Tutorial 11 Past Exam Question The Mowlem Company uses a standard costing system

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Tutorial 11 Past Exam Question The Mowlem Company uses a standard costing system. The standard cost specification for one unit of output is set out below: $30 12 2 Direct Materials (15kg@ $2/kg) (10 mins Fixed Variable $12 per hour) Direct Labour: Overhead The Company's flexible budget for manufacturing overhead at a budgeted capacity of 22,800 units, totaled $410,400. This consisted of $342,000 of budgeted fixed overhead, and $68,400 of budgeted variable overhead. The company allocates overhead based on direct labour hours Actual Cost and production data for 21,500 units produced in the month were as follow ActuaQuantity Quantity Actual Cost PricePurchased Inputs $2.20/kg400,000kg 325,000kg Material A Material B Direct Labour Fixed Mfg $3.90/kg60,000kg 60,000kg $44,165 3,650 hours $344,600 Indirect Materials & Indirect Labour (all variable Other Variable Mfg Overhead $15,487 $51,905 The company records all variances as early as possible Required: (a) Calculate the following Variances (i) Price and quantity (efficiency) variances for Material A and Material B (ii) Labour Rate(Price) and Efficiency Variances (ii) All Variable Overhead and Fixed Overhead Variances (iv) The Flexible Budget Variance for manufacturing costs (b) Briefly comment on the results of your analysis, whether management should investigate any or all of the variances and if so, provide one possible cause of any significant variance (c) Prepare the journal entries to record (i) the price and efficiency variances for Material A (ii) the overhead costs incurred, allocated and the overhead variances

Explanation / Answer

A). Calculation of Following Variances:

1. Material Price Variance  is the difference between the standard cost and the actual cost for the actual quantity of materialpurchased

MAT A Standard Cost $ 2 per kg

actual cost $ 2.20 per kg

Unfavorable Price Variance ( 2 - 2.20 )*15*21500 = $64,500

Total kg of Material A required 15*21500= 322500 kgs

MAT B

Standard cost $ 4 per kg

actual cost $ 3.9 per kg

Favourable variance of 0.10 per kg of Material

Total kg of material for B = 3*21500=64,500 kgs

Material price variance for B

64500*0.10= $6450 F

Material quantity Variance- the difference between the actual quantity at standard price and the standard cost is the direct materials quantity variance.

FOR MATERIAL A

standard quantity for 21500 units of production 21500*15kg= 322500kgs

actual quantity = 325000 kgs

unfavorable quantity variance = (325000-322500)*2 per kg = ($5000) unfavorable variances

FOR MATERIAL B

standard quantity for 21500 units of production 21500*3kg= 64500kgs

actual quantity = 60000 kgs

unfavorable quantity variance = (60000-64500)*4 per kg = $ 18000 favorable variances

B ) LABOUR RATE VARIANCE = actual rate*actual hour - actual hours*standard rate.

he labor rate variance is found by computing the difference between actual hours multiplied by the actual rate and the actual hours multiplied by the standard rate

actual rate= $44165/3650 hours = 12.1/per hour

actual hour= 3650 hours

standard rate= $12/per hour

labour rate variance= (actual rate*actual hour) - (actual hours*standard rate).

= (12.1*3650)-(3650*12)= unfavourable variances of $(365)

Labour effeicency variances measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.

actual hour = 3650 hours

standard hour = 21500* 10minutes/ 60minutes = 3583 hours

standard rate= $ 12/ per hour

Labour effieceny variance = (3650-3583)*12= ($804) unfavourable Variances

C) Overhead Variances:-

Variable Overhead effiecency/spending Variances

Where,
   SR is the standard variable overhead rate
   AR is the actual variable overhead rate
   AU are the actual units of allocation base

Standard rate = 68400/2280 = $3 per Unit

Actual rate = 67392(Total variable Overhead Expenditure)/ 21500 = $3.13 per unit

VOH Spending Variance = ( 3 - 3.13 )* 21500 = ($2795) unfavorable Variance

Fixed Overhead Variance :

Fixed Overhead Total Variance is the difference between actual and absorbed fixed production overheads during a period

Absorption rate :- budgeted fixed overhead/ budgeted output

$342000/22800 = $15

Actual Fixed Overehead = $344600

Standard F Oh = 15*21500 = $322500

Unfavorable Fixed overhead Variance = 344600-322500 = $22,100 (UF)

Fixed Overhead Expenditure Variance

Actual-budgeted

344600-342000 = 2600 (UF) unfavorable

Fixed Overhead Volume Variance

Budgeted - absorbed

342000-322500= $ 19500 (UF) Unfavorable

D) Flexible Budget Variance

Particulars Budgeted Actual

Material Cost (21500) units

A 15*21500*2 645000 715000 ( 2.2*325000kgs)

B 3*21500*4 258000 234000 ( 3.9*60000 kgs)

Labour (21500*10/60)*12 43000 44165 (Given)

Overhead

Variable (68400/22800)*21500 64500 67392 (Given) 15487+51905

FIxed (342000/22800)*21500 322500 344600

Total 13,33,000 14,05,157

Budgeted Felxible Variance = 14,05,157-13,33,000 = 72,157 Unfavourable Variance.

VOH Spending Variance = ( SR ? AR ) × AU

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