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Step 3: Calculate The Variance

The document contains 5 questions regarding variances in manufacturing: 1. There was an adverse material usage variance of $3,000 due to using 500 more sheets than allowed. 2. Labor efficiency variance was unfavorable by $2,000 because actual hours were 200 more than standard. 3. Material mix variance was favorable by $350 as actual raw material mixes varied from standards. 4. Incremental analysis showed scrapping units would provide $4,000 profit vs $2,000 for rebuilding, so scrapping was favored. 5. Accepting a special order using excess capacity would increase profit by $20,000, so it was recommended to accept the order.

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29 views

Step 3: Calculate The Variance

The document contains 5 questions regarding variances in manufacturing: 1. There was an adverse material usage variance of $3,000 due to using 500 more sheets than allowed. 2. Labor efficiency variance was unfavorable by $2,000 because actual hours were 200 more than standard. 3. Material mix variance was favorable by $350 as actual raw material mixes varied from standards. 4. Incremental analysis showed scrapping units would provide $4,000 profit vs $2,000 for rebuilding, so scrapping was favored. 5. Accepting a special order using excess capacity would increase profit by $20,000, so it was recommended to accept the order.

Uploaded by

teddy
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© © All Rights Reserved
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Q1.

Actual Material Used = 55,500 Sheets of Materials


Standard Material Allowed = 55,000 Sheets of Materials
Standard Price of Materials per sheet = $6
Material Used Variance = (Standard Material Allowed - Actual Material Used) * Standard Price of Materials per sheet
= (55,000 - 55,500) * $6
= (500 * $6)
= ($3,000)  Adverse
Q2.
Actual Labor Hour = 22,200 hr
Standard Labor Hour = 22,000 hr
Standard Labor Rate = $10 per hr
Labor Efficiency Variance = (Actual hours worked - Standard hours Allowed) * Standard rate per hour
= (22,200 - 22,000) * $10
= 200 * $10
= $2,000  unfavorable
Q3.
Manufactured 10,000 bags of cement
Material Quantity Used Standard Mix per Bag Actual Price Standard Price
Limestone 100 tons 11 Kg $75/ton $70/ton
Clay 150 tons 14 Kg $21/ton $20/ton
Sand 250 tons 26 Kg $11/ton $10/ton
Material Mix Variance will be calculated as follows
Step 1: Calculate the total consumption of raw materials and total quantity under standard usage
Total Raw Materials consumption = 100 tons + 150 tons + 250 tons
= 500 tons
Total Quantity under Standard Usage = 11 K.g + 14 K.g +26 K.g
= 51 K.g.
Step 2: Calculate the standard Mix
We need to calculate the quantity of each raw material which would have been consumed had the total
usage of raw materials (500 tons) been based on the standard mix.
Limestone: = 500 tons units *11 / 51 = 108 tons
Clay: = 500 tons units * 14 / 51 = 137 tons
Sand: = 500 tons units * 26 / 51 = 255 tons

Note that the sum of the standard mix of raw materials calculated above equals the actual total consumption
of 500 tons. This is because in material mix variance, we are not concerned about the efficiency of raw
material consumption but rather their relevant proportions

Step 3: Calculate the Variance

Material Usage Variance = [Actual Mix - Standard Mix (Step 2)] x Standard Price

Limestone: (100 - 108) x $70 = ($560) Favorable


Clay: (150 - 137) x $20 = $260 Adverse
Sand: (250 - 255) x $10 = ($50) Favorable
Total Usage Variance ($350) Favorable

Note: Actual price paid for the acquisition of materials shall be ignored since any variation between standard
price is already accounted for in the material price variance..
Q4.
Particulars Units (A) Rate(B) in Birr Amount (A * B)
Sales of Scarp units 10,000 0.04 4,000
Sales of Rebuilt units 10,000 1.50 15,000
Opportunity Cost 10,000 0.50 5,000
Cost of Rebuilt 10,000 0.80 8,000

Note: the opportunity cost (0.50 ETB) is the difference between the sales of rework (1.50 ETB) and replacement cost
(1.00 ETB).

The increment income for the selling the units as scarp and rebuilt
Particulars Sales of Scarp Rebuilt
Sales of Scarp units 4,000
Sales of Rebuilt units 15,000
Opportunity Cost of not making new units (5,000)
Cost of Rebuilt (8,000)
Incremental Income (Loss) 4,000 2,000

Then based on the above Incremental Income analysis Akaki Metal Works Factory should scrap the units now.
Because sales of scarp (4,000 ETB) is greater than sales of rebuilt (2,000 ETB)

Decision rule

Akaki Metal Works Factory should scrap the units now


Q5.

Has Excess Capacity Current Additional Business Combined


Business
Quantity Per Units Total
Sales 1,000,000 10,000 8.50 85,000 1,085,000
Direct Materials 350,000 10,000 3.50 35,000 385,000
Direct Labor 220,000 10,000 2.20 22,000 242,000
Factory Overhead 110,000 10,000 1.10 5,000 115,000
Selling Expense 140,000 10,000 1.40 2,000 142,000
Admin. Expense 80,000 10,000 0.80 1,000 81,000
Total Expense 900,000 10,000 9.00 65,000 965,000
Operating Income 100,000 10,000 1.00 20,000 120,000

10,000 new units * 8.50 ETB selling price = 85,000 ETB


10,000 new units * $3.50 ETB = 35,000 ETB
10,000 new units * 2.20 ETB = 22,000 ETB
Even though the Selling price (Birr 8.50) is less than the normal selling price (Birr 10.00), Addis PLC should accept the
offer because net income will increase by 20,000 Birr.
Decision rule

Accept the special order when there’s an incremental benefit for the company.
Bonus Question

Given

Actual Labor rate = 10.50

Standard Labor rate = 10

Actual hour worked = 22,200

Solution

Labour rate variance = (Actual rate – Standard rate) x Actual hours worked

= ($10.50 actual rate – $10 per hour standard) x 22,200 actual hours

= $ 0.50 x 22,200

= $ 11,100 Unfavourable Variance

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