Answers to more worked examples

Answer to example 1
Original
Fixed Flexed Actual Variances
Budget Budget
Sales (units) 8000 8400 8400
Production(units) 8700 8900 8900

Sales value 600000 630000 613200 16800 A

Less cost of sales:
Materials 156600 160200 163455 3255 A
Labour 217500 222500 224515 2015 A
Variable overheads 87000 89000 87348 1652 F
Fixed overheads 130500 133500 134074 574 A
Total production cost 591600 605200 609392
Less closing stock 47600 34000 34000
Cost of sales 544000 571200 575392
Gross profit 56000 58800 37808 20992 A

Note!
1) The closing inventory is valued at standard cost, i.e. $68
2) The flexed fixed cost is $133500 (15*8900) and not $130500
3)The total variance is the difference between the flexed budget and the actual result.
4) The total variances are calculated for only the elements of cost and also for sales and profit

Answer to example 2
Analysis of the total sales variance

Sales price variance = (Standard selling price-Actual selling price)*Actual quntity sold
Standard selling price 75
Actual selling price 73
Difference 2 A
Multiply by actual Quantity sold 8400
Sales price variance 16800 A

Sales volume variance = (Budgeted sales vol- Actual sales volume)*Standard profit
Budgeted sales volume 8000
Actual sales volume 8400
Difference 400 F
Multiply by Standard profit 7 75-68
Slaes volume variance 2800 F

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Analysis of the total direct material cost variance

Material price variance = (Standard mat price- Actual mat price)* Actual quantity purchased
Standard price of the material 4.5
Actual price of the material 4.6090
Difference 0.1090 A
Multiply by quantity of materials purchased 35464
Material price variance 3867 A

Material usage variance =( Std usage for act prod- Actual usage)* Standard price of materials
Standard usage for actual production 35600 kg
Actual usage for actual production 35464 kg
Difference 136 F
Multiply by Standard price of materials 5
Material usage variance 612 F

Analysis of the total direct labour cost variance

Wage rate variance = (Standard wage rate-Actual wage rate)* Hours paid
Standard wage rate 5
Actual wage rate 4.9453
Difference 0.0547 F
Multiply by hours paid 45400
Wage rate variance 2485 F

Labour efficiency variance = (Std lab hours for act prod-Actual lab hours )* Standard wage rate
Standard labour hours for actual product 44500 hrs 5*8900
Actual labour hours for actual production 44100 hrs
Difference 400 F
Multiply by Standard wage rate of labour 5
Labour efficiency variance 2000 F

Idle time varianc = Idle labour hours * standard wage rage

Idle labour hours = Actual hours paid- Actual hours worked
Actual hours paid 45400
Actual hours worked 44100
Idle labour hours 1300
Multiply by Standard wage rate 5
6500 A

Note!

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Idle time variance is an adverse variance

Analysis of the total variable overhead cost variance

Variable overhead expend variance

Variable overheads absorbed on the standard - Actual variable overhead cost incurred
Var o/h cost absorbed on the standard $2 x 44100 88200
Actual variable overheads cost incurred 87348
852 F

Variable overhead efficiency variance = (Std lab hours- Actual lab hours)* Std var OAR
Standard lab hours for actual production 44500 5*8900
Actual lab hours for actual production 44100
Difference 400
Multiply by Standard variable OAR 2
800 F

Anlysis of the total fixed overhead cost variance

Fixed overhead expenditure variance= Budgeted fixed overheads- Actual fixed overheads
Budgeted fixed overhead cost 130500 15*8700
Actual fixed overhead cost 134074
Fixed overhead expend variance 3574 A

Fixed o/h volume var = (Budgeted prod volume-Actual prod volume)*Std fixed o/h cost per unit
Budgeted production volume 8700
Acual production volume 8900
Difference 200 F
Multiply by Standard fixed o/h per unit 15
3000 F

Note!
The fixed overhead volume variance can further be analysed into
1) Volume capaity variance
2)Volume efficiency variance
Lets us calculate the above variances

Fixed o/h capacity var = (Budgeted level of activity-Actual level of activity)* Std fixed OAR
Budgeted level of activity(lab hrs) 43500 8700*5
Actaul level of activity(lab hrs) 44100
Difference 600 F

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 Multiply by Standard fixed OAR 3
1800 F
NB!
Fixed o/h efficienty variance = (Stand lab hours -Actual lab hours)* Stand fixed OAR
Standard labour hours for actual production 44500 5*8900
Actual labour hours for actual production 44100
Difference 400 F
Multiply by Standard fixed OAR 3
1200 F

Preparation of the operating statement

Before we prepare the operating statementy, let us calculate the budgeted profit and
actual profit

Calculation of budgetd profit

Standard profit 7 75-68
Budgeted sales volume(units) 8000
Budgeted profit 56000

Calculation of Actual Profit

Actual sales value 613200
Less Actual cost of sales:
Matrerial cost 163455
Labour cost 224515
Variable production overheads 87348
Fixed production overheads 134074
Total cost of production 609392
Less value of closing stock 500*68 34000 8900-8400
Actual cost of sales 575392
Actual profit 37808

Note!
The closing stock is valued at standard cost!!!!

Now let us reconcile the budgeted profit with the actual profit!
For this purpose, we prepare an operating statement as shown below!

Operating Statement
Budgeted profit 56000
Sales price variance 16800 A

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Sales volume variance 2800 F
Materialprice variance 3867 A
Material usage variance 612 F
Wage rate variance 2485 F
Labour efficiency variance 2000 F
Idle time variance 6500 A
Var overhead expenditure variance 852 F
Var overhead efficiency variance 800 F
Fixed overhead expenditure variance 3574 A
Fixed overhead volume variance 3000 F
Actual profit 37808

NB!
We could have shown the breakdown, for the fixed overhead volume variance
i.e volume capacity variance and volume efficiency variance

Answer to example 3
(a)
Orig Fixed
Actual Variances
Budget Flexed Budget
Sales (units) 8000 8400 8400
Production(units) 8700 8900 8900

Sales value 600000 630000 613200 16800 A

Less the variable cost of sales:
Materials 156600 160200 163455 3255 A
Labour 217500 222500 224515 2015 A
Variable overheads 87000 89000 87348 1652 F
Total var cost of production 461100 471700 475318
Less closing stock @ var cost($53) 37100 26500 26500
Variable cost of sales 424000 445200 448818
Contribution 176000 184800 164382
Fixed overheads 130500 133500 134074 574 A
Profit 45500 51300 30308 15192 A

NB!
Absorption costing profit 37808
Less fixed o/h in closing inventory 15*500 7500
Marginal costing profit 30308

(b)
To prepare an operating statement, we have to calculate price and quantity variances as

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done in example 2.

NB!
Please note that in a standard variable costing system
1) we calculate ONLY fixed overhead expendure variance! WHY?
Because in a variable costing system, there is no abosoption of fixed production
overheads so there can't be any fixed overhead var due to capacity(level of activity)
2) the sales volume variance is calculated using standard contribution instead of
standard profit. Lets us calculate the sales volume var
Lets us calculate the sales volume variance

Sales volume variance

Sales volume var = (Budgeted sales volume-Actual sales volume)* Stand contribution per unit
Budgeted sales volume 8000
Actual sales volume 8400
Difference 400 F
Multiply by Standard contrib 75-53 22
Sales volume variance 8800 F

Note!
All the other price and quantity variances remain the same as in example 2
This means that we have all the variances required to prepare an operating statement
Let us prepar the operating statement!

Operating Statement: Standard variable costing system

Budgeted profit 45500
Sales price variance 16800 A
Sales volume variance 8800 F
Material price variance 3867 A
Material usage variance 612 F
Wage rate variance 2485 F
Labour efficiency variance 2000 F
Idle time variance 6500 A
Var overhead expenditure variance 852 F
Var overhead efficiency variance 800 F
Fixed overhead expenditure variance 3574 A
Actual profit 30308

Answer to example 4
I will give you the answer to photocopy! I can't type it!

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Answer to example 5
Material Variances
Material price Variance
Material Price Variance = (Standard price -Actual Price )* Quantity Purchased
Standard price of the materials 4.00
Actual price of material the materials 4.26087 9800/2300
Difference 0.26087 A
Multiply by Quantity purchased 2300
600 A
Material usage variance
Material Usage variance = (Standard Usage- Actual Usage)* Standard Price
Standard usage for actual production 2425 kg 4850*0.5kg
Actual usage for actual production 2300 kg
Difference 125 F
Multiply by Standard price of materials 4
Material Usage Variance 500 F

Labour variances
Wage rate variance
Wage rate variance =(Standard wage rate- Actual wage rate)* Hours paid
Standard wage rate 2.00
Actual wage rate 16800/8500 1.9765
Difference 0.0235 F
Multiply by hours paid 8500
200 F

Labour efficiency variance

Labour efficiency varinace = (Standard hours -Actual hours )* Standard rate
Standard hours for actual production 9700 4850*2
Actual hours for actual production 8000
Difference 1700 F
Multiply by Standard wage rate 2
Labour efficiency Variance 3400 F

Idle time variance

Idle time variance =Idle labour hours x Standard wage rate
Idle labour hours = Labour hours paid-Labour hours worked

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Labour hours paid 8500
Labour hours worked 8000
Difference(Idle labour hours) 500
Multiply by standard wage rate 2
Idle time variance 1000 A

The idle time variance is calculated when labour hours paid is diferent from hours worked
that , it is calculated when there is idle time

Variable overhead expenditure variance

Var ovehead exp variance=(Standard Var OAR-Actual var OAR) * Hours worked
Standard variable overhead absoprtion rate 0.3000
Actual variable overhead absorption rate 0.3250 2600/8000
Difference 0.0250 A
Multiply by actual labour hours worked 8000
200 A

Alternative Approach
Var ovehead exp variance=Var overhead absorbed on the standard- Actual var overhead
Variable overhead absorbed on the standard 2400 0.3*800
Actual variable overhead expend 2600
200 A

Variable overhead efficiency variance

Var ovehead eff var=(Standard labour hours-Actual labour hours)*Stand Var OAR
Standard lab hours for actual production 9700
Actual labour hours for actual production 8000
Difference 1700 F
Multiply by standrd Var overhead absoption rate 0.3000
Variable overhead efficiency Variance 510 F

Fixed overhead expenditure variance

Fixed ovehead exp variance=Budgeted fixed overheads -Actual fixed overheads
Budgeted fixed overhead cost 37740 5100*7.40
Actual fixed overhead cost 42300
Fixed Overheds Expenditure Variance 4560 A

Fixed overhead volume variance

Fixed Overhead Vol Var = (Budgeted Prod-Actual Prod)*Fixed overhead cost per unit
Budgeted production volume 5100
Actual production volume 4850
Difference 250 A
Multiply by Fixed overhead cost per unit 7.400

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Fixed Overhead Volume Variance 1850 A

NB!
The fixed overhead volume variance can be further analysed into
1) Volume capaity variance
2)Volume efficiency variance

Lets us calculate the above variance s

Fixed overhead Volume capacity variance

Fixed o/h volume capacity var = (Bud level of activity-Actual level of activity)*Stand fixed OAR
Budgeted level of activity(lab hours) 10200 5100*2
Actaual level of activity(lab hours) 8000
Difference 2200 A
Multiplied by Standard fixed OAR 3.700
8140 A

Fixed overhead Volume efficienty variance

Fixed o/h Vol efficienty var= (Stand lab hours- Actual lab hours)* Standard fixed OAR
Standard lab hours for actual production 9700
Actual lab hours for actual production 8000
Difference 1700 F
Multiply by Standard fixed OAR 3.70
6290 F

Sales price variance

Sales Price Variance= (Standard selling price-Actual selling price )* Actual quantity sold
Standard selling price 20.00
Actual selling price 95600/4850 19.7113
Difference 0.2887 A
Multiply by Actual quantity sold 4850
1400 A

Sales volume variance

Sales Volume Variance= (Budgeted sales volume-Actual sales volume)* Standard profit
Budgeted sales volume 5100
Actual sales volume 4850
Difference 250 A
Multiply by Standard profit 6
Sales Volume Variance 1500 A

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Preparation of the operating statement
Before we prepare the operating statementy, let us calculate the budgeted profit and
actual profit

Calculation of budgetd profit

Standard profit 6
Budgeted sales volume(units) 5100
Budgeted profit 30600

Calculation of actual profit

Actual sales value 95600
Less cost of sales:
Material cost 9800
Labour cost 16800
Variable production overheads 2600
Fixed production overheads 42300
Total cost of production 71500
Less value of closing stock 0*14 0.0000
Cost of sales 71500
Actual profit 24100

NB! There is no closing stockt!!!!

Now let us reconcile the budgeted profit with the actual profit!
For this purpose, we prepare an operating statement as shown below!

Operating Statement
Budgeted profit 30600 6*5100
Sales price variance 1400 A
Sales volume variance 1500 A
Materialprice variance 600 A
Material usage variance 500 F
Wage rate variance 200 F
Labour efficiency variance 3400 F
Idle time variance 1000 A
Var overhead expenditure variance 200 A
Var overhead efficiency variance 510 F
Fixed overhead expenditure variance 4560 A
Fixed overhead volume variance 1850 A
Actual profit 24100

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Answer to example 6
Please see the pdf document: gayomey_Topic 2_Part1_Answers.pdf ( page 1 to 7)

Answer to example 7
Please see the pdf document: gayomey_Topic 2_Part1_Answers.pdf ( page 8 to 10)

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8900-8400

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