Question

Question 3

CABCo operates an absorption costing system and sells three products B, R and K which are substitutes for each other. The following standard selling price and cost data relate to these three products:

                   Products Selling price        Direct material/unit           Direct labour/unit

B                         GHS14.00           3 kgs @ GHS1.80/kg          0.5 hours @ GHS6.50/hour

R                         GHS15.00           1.25 kgs @ GHS3.28/kg    0.8 hours @ GHS6.50/hour

K                          GHS18.00           1.94 kgs @ GHS2.50/kg    0.7 hours @ GHS

Budgeted fixed production overhead for the last period was GHS81,000. This was absorbed on a machine hour basis. The standard machine hours for each product and the budgeted levels of production and sales for each product for the last periods are as follows:

                        Product                                                              B                     R                    K

                        Standard machine hours per unit                  0.3hours       0.6hours       0.8hours

                        Budgeted production and sales (units)          10,000           13,500            8,500

Actual volumes and selling prices for the three products in the last period were as follows

                         Product                                                       B                       R                      K

Actual selling price per unit GHS14.50        GHS15.50       GHS19.00

      Actual production and sales (units) 9,500                 13,500              8,500

Calculate the following variances for overall sales for the last period:

1. Sales price variance
2. Sales volume profit variance
3. Sales mix profit variance
4. Sales quantity profit variance

Answer 1

Calculation of Budgeted fixed production overhead allocated to each Product:

Budgeted fixed production overhead = GHS81,000.

Budgeted fixed production overhead are allocated to Products B, R and K based on Budgeted machine hours.

	B	R	K	Total
a. Budgeted Production and Sales (units)	10,000	13,500	8,500
b. Standard machine hour per unit	0.3 hours	0.6 hours	0.8 hours
c. Budgeted machine hours (a x b)	3,000 hours	8,100 hours	6,800 hours	17,900 hours
d. Fixed Production Overheads allocated to Products	GHS13,575 [(81,000/17,900) x 3,000]	GHS36,654 [(81,000/17,900) x 8,100]	GHS30,771 [(81,000/17,900) x 3,000]	GHS81,000
e. Fixed Production Overheads Per unit (d / a)	GHS1.36	GHS2.72	GHS3.62

Calculation of Budgeted Profit per unit:

	B	R	K
Selling Price per unit	GHS14	GHS15	GHS18
Less: Costs
Direct material per unit	GHS5.40 (3Kgs @ GHS1.80/Kg)	GHS4.10 (1.25Kgs @ GHS3.28/Kg)	GHS4.85 (1.94Kgs @ GHS2.50/Kg)
Direct labour per unit	GHS3.25 (0.5 Hr @GHS6.50/Hr)	GHS5.2 (0.8 Hr @GHS6.50/Hr)	GHS4.55 (0.7 Hr @GHS6.50/Hr)
Fixed Production Overhead per unit	GHS1.36	GHS2.72	GHS3.62
Total Costs	GHS10.01	GHS12.02	GHS13.02
Budgeted Profit per unit	GHS3.99	GHS2.98	GHS4.98

Data for computing sales variances:

Product	Budgeted Sales Quantity	Budgeted Sales Mix Quantity	Actual Quantity	Budgeted Profit per unit	Budgeted Selling price per unit	Actual Selling price per unit
B	10,000	9,844 [(31,500/30,000) x 10,000]	9,500	GHS3.99	GHS14	GHS14.50
R	13,500	13,289 [(31,500/30,000) x 13,500]	13,500	GHS2.98	GHS15	GHS15.50
K	8,500	8,367 [(31,500/30,000) x 8,500]	8,500	GHS4.98	GHS18	GHS19
Total	32,000	31,500	31,500

Sales Price Variance = (Budgeted selling price - Actual selling price) x Actual Quantity

Sales Price Variance for Product B = (14 - 14.50) x 9,500 units = GHS4,750 (F) Favorable

Sales Price Variance for Product R = (15 - 15.50) x 13,500 units = GHS6,750 (F) Favorable

Sales Price Variance for Product K = (19 - 18) x 8,500 units = GHS8,500 (A) Adverse

Sales Volume Profit Variance = (Budgeted Quantity - Actual Quantity) x Budgeted Profit per unit

Sales Volume Profit Variance for Product B = (10,000 - 9,500) x GHS3.99 = GHS1,995 (F) Favorable

Sales Volume Profit Variance for Product R = (13,500 - 13,500) x GHS2.98 = GHS0 No effect

Sales Volume Profit Variance for Product K = (8,500 - 8,500) x GHS4.98 = GHS0 No effect

Sales Mix Profit Variance = (Budgeted Mix Quantity - Actual Quantity) x Budgeted Profit per unit

Sales Mix Profit Variance for Product B = (9,844 - 9,500) x GHS3.99 = GHS1,373 (A) Adverse

Sales Mix Profit Variance for Product R = (13,289 - 13,500) x GHS2.98 = GHS629 (F) Favorable

Sales Mix Profit Variance for Product K = (8,367 - 8,500) x GHS4.98 = GHS662 (F) Favorable

Sales Quantity Profit Variance = (Budgeted Quantity - Budgeted Mix Quantity) x Budgeted Profit per unit

Sales Quantity Profit Variance for Product B = (10,000 - 9,844) x GHS3.99 = GHS622 (A) Adverse

Sales Quantity Profit Variance for Product R = (13,500 - 13,289) x GHS2.98 = GHS629 (F) Favorable

Sales Quantity Profit Variance for Product K = (8,500 - 8,367) x GHS4.98 = GHS662 (A) Adverse