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QUESTION 4 The underlisted data relate to actual output, costs and variances for the monthly accounting...

QUESTION 4
The underlisted data relate to actual output, costs and variances for the monthly accounting
period of a company that makes only one product. Opening and closing work in progress were
the same.
Variances:
GH₵
Direct materials price
30000 F
Direct materials usage
18000 A
Direct labour rate
16000 A
Direct labour efficiency
32000 F
Variable production overhead expenditure
12000 A
Variable production overhead efficiency
8000 F
Variable production overhead varies with labour hours worked.
A standard marginal costing system is operated.
Actual production of product BM
36,000 units
Actual costs incurred:
Direct materials purchased and used (300,000 kg)
GH₵420,000
Direct wages for 64000 hours
GH₵272,000
Variable production overhead
GH₵76,000
Required:
(a) (i)
Calculate the standard cost of materials and standard rate per labour hour.
(ii)
Prepare a standard product cost sheet for one unit of product BM.
(b) Explain the possible causes of the following variances:
(i)
Material price variance
(ii)
Material usage variance
(iii)
Wage rate variance
(iv)
Labour efficiency variance

Solutions

Expert Solution

(a) (i) Standard Cost of Materials:

Material Cost Variance = Material Price Variance + Material Usage Variance

Material Cost Variance = GH₵ 30,000 (F) + GH₵ 18,000 (A)

Material Cost Variance = GH₵ 12,000 (F).

Material Cost Variance = Standard Cost - Actual Cost

Material Cost Variance = (Standard Quantity X Standard Price) - (Actual Quantity X Actual Price)

GH₵ 12,000 (F) = Standard Cost - GH₵ 4,20,000

Standard Cost of Materials = GH₵ 4,32,000.

Standard Rate per Labour Hour:

Labour Rate Variance = ( Actual Hours X Standard Rate) - (Actual Hours X Actual Rate)

GH₵ 16,000 (A) = ( 64,000 hours X Standard Rate) -  GH₵ 272,000

GH₵ 16,000 (A) = ( 64,000 hours X SR ) -  GH₵ 272,000

( 64,000 hours X SR ) = GH₵ 16,000 (A) + GH₵ 272,000

( 64,000 hours X SR ) = GH₵ 256,000

Standard Rate (SR) = GH₵ 256,000 / 64,000 Hours

Standard Rate (SR) = GH₵ 4 per Labour Hour.

(ii) Standard Product Cost Sheet for ONE unit of Product BM

Particulars Amount
Direct Materials (GH₵ 4,32,000 / 36,000 Units) GH₵ 12
Direct Labour GH₵ 4
Variable Production Overhead (*Note 1) GH₵ 1
Total Cost GH₵ 17

*Note 1:

Variable Overhead Expenditure Variance = ( Actual Hours X Standard Rate) - (Actual Hours X Actual Rate)

GH₵ 12,000 (A) = ( 64,000 hours X Standard Rate) - GH₵ 76,000

GH₵ 12,000 (A) = ( 64,000 hours X SR ) - GH₵ 76,000

( 64,000 hours X SR ) = GH₵ 12,000 (A) + GH₵ 76,000

( 64,000 hours X SR ) = GH₵ 64,000

Standard Rate (SR) = GH₵ 64,000 / 64,000 Hours

Standard Rate (SR) = GH₵ 1 per Labour Hour

(b) Possible Causes:

(i) Material Price Variance:

  • Changes of Prices (increase / decrease) in the market.
  • Agreement with suppliers as to raise or reduce the price.
  • Loss of cash discount since the payment is not made within specified period.

(ii) Material Usage Variance:

  • Negligence in use of materials.
  • More wastage of materials by untrained workers.
  • Adopting defective or wring or improper production process.

(iii) Wage Rate Variance:

  • Employment of more efficient and skilled labor force demanding higher rate of wages.
  • Sometimes, there may be non-availability of labor force but they are demanding higher rate of wages.
  • Employment of unskilled workers at lower rates might have caused less payment for wages.

(iv) Labour Efficiency Variance:

  • Go slow tactics adopted by the trade union.
  • Defective and bad materials.
  • Insufficient training and incorrect instructions.

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