Question

The budgeted and actual results for June 2020 are as follows:

	Budget		Actual
Production (units)		150,000		150,500
Direct material A	300,000m2	£675,000	316,050m2	£695,310
Direct material B	900,000	£18,000	1,053,500	£21,070
Direct labour	37,500 hours	£318,750	37,625 hours	£323,575
Fixed overheads		£287,500		£300,623.75

You are required to:

1. Calculate all possible variances from the information provided above for June and use the variances to reconcile the actual cost of production with the standard cost of production.

2. Evaluate the variances calculated in terms of what might have caused them and what, if anything, could be put done to bring them back under control.

Answer 1

a. Calculation of all possible variances from the information provided for June:

Budgeted cost data for production of 150,000 units

	Budgeted quantity or hours	Budgeted Price or Rate	Budgeted Cost
Direct materials A	300,000 m2	£1.25	£375,000
Direct materials B	900,000	£0.02	£18,000
Direct labor	37,500 hours	£8.50	£318,750
Budgeted fixed overhead			£287,500
Budgeted cost of 150,000 units		£999,250

Budgeted direct material A price per unit = £375,000 / 300,000 = £1.25

Budgeted direct material B price per unit = £18,000 / 900,000 = £0.02

Budgeted direct labor rate per unit = £318,750 / 37,500 = £8.50

Standard cost data allowed for production of 150,500 units will be:

	Standard quantity or hours	Standard Price or Rate	Standard Cost
Direct materials A	301,000 m2 (300,000 / 150,000) x 150,500	£1.25	£376,250
Direct materials B	903,000 (900,000 / 150,000) x 150,500	£0.02	£18,060
Direct labor	37,625 hours (37,500 / 150,000) x 150,500	£8.50	£319,812.50
Standard fixed overhead	[(£287,500 / 150,000) x 150,500]		£288,458.33
Standard cost of 150,500 units		£1,002,580.83

Actual cost data for production of 150,500 units is:

	Actual quantity or hours	Actual Price or Rate	Actual Cost
Direct materials A	316,050 m2	£2.20	£695,310
Direct materials B	1,053,500	£0.02	£21,070
Direct labor	37,625 hours	£8.60	£323,575
Actual fixed overhead			£300,623.75
Actual cost of 150,500 units		£1,340,578.75

Actual direct material A price per unit = £695,310 / 316,050 = £2.20

Actual direct material B price per unit = £21,070 / 1,053,500 = £0.02

Actual direct labor rate per unit = £323,575 / 37,625 = £8.60

1. Direct material Price variance = (Standard price - Actual price) x Actual Quantity of material

Direct material Price variance of  Direct materials A = (£1.25 - £2.20) x 316,050 = £300,247.50 (U) Unfavorable

Direct material Price variance of  Direct materials B = No effect (since both the standard price and actual price of direct material B is same)

2. Direct material quantity variances = (Standard quantity - Actual quantity) x Standard price per material

Direct material quantity variance of  Direct materials A = (301,000 - 316,050) x £1.25 = £18,812.50 (U) Unfavorable

Direct material quantity variance of  Direct materials B = (903,000 - 1,053,500) x £0.02 = £3,010 (U) Unfavorable

3. Direct labor rate vairance = (Standard rate - Actual rate) x Actual labour hours = (£8.50 - £8.60) x 37,625 = £3,762.50 (U) Unfavorable

4. Direct labor efficiency variance = (Standard labour hours - Actual labour hours) * Standard rate per labour hour

= No effect (since both the standard labor hours and the actual labor hurs are same).

5. Fixed overhead spending varaince = Budgeted fixed overhead - Actual fixed overhead

= £287,500 - £300,623.75 = £13,123.75 (U) Unfavorable

6. Fixed overhead volume variance = Standard fixed overhead - Budgeted fixed overhead

= £288,458.33 - £287,500 = £958.33 (F) Favorable

Reconciliation statement showing the actual cost of production with the standard cost of production:

Item	£	£
Standard cost of 150,500 units	£1,002,580.83
Adjustments:
Direct materials Price variances:
Direct materials A	£300,247.50
Direct materials B	£0	£300,247.50
Direct materials Quantity variances:
Direct materials A	£18,812.50
Direct materials B	£3,010	£21,822.50
Direct labor rate variance		£3,762.50
Direct labor efficiency variance	£0
Fixed overhead spending varaince	£13,123.75
Fixed overhead volume variance	-£958.33
Actual cost of 150,500 units		13,40,578.75

b. Actions to be taken to bring them back under control are:

Direct material price variance for direct materials A is unfavorable since the actual material price is higher than the standard material price, the company should instruct the purchase manager to purchase the material at the budgeted price to bring the price under control and thus it will helps to control the cost.

Direct material quantity variance for direct materials A is unfavorable since the actual material used is higher than the standard material allowed. The Company's production manager should focus on the usage of the material to bring down the usage of material and thus the company can reduce the costs.

Direct material quantity variance for direct materials B is unfavorable since the actual material used is higher than the standard material allowed. The Company's production manager should focus on the usage of the material to bring down the usage of material and thus the company can reduce the costs.

Direct labor rate variance is unfavorable since the hiring manager has hired the labor above the standard labor rate per labor hour. The Company's hiring manager should bring the labor at the estimated rate to reduce the labor cost.

Direct labor efficiency variance has no effect since the standard labor hours allowed and actual labor hours worked are same.

Fixed overhead spending variance is unfavorable since the company has spent more fixed expenses during the period than budgeted. The company should reduce the fixed cost.