Question

Comprehensive Ghana Limited has prepared the following standard cost card:
GH¢ per unit
Materials (4 kg at GH¢4.50 per kg) 18
Labour (5 hrs at GH¢5 per hr) 25
Variable overheads (5 hrs at GH¢2 per hr) 10
Fixed overheads (5 hrs at GH¢3 per hr) 15
GH¢68
Budgeted selling price GH¢75 per unit.
Budgeted production 8,700 units
Budgeted sales 8,000 units
There is no opening inventory.
The actual results are as follows:
Sales: 8,400 units for GH¢613,200
Production: 8,900 units with the following costs:
Materials (35,464 kg) 163,455
Labour (Paid 45,400hrs; worked 44,100 hrs) 224,515
Variable overheads 87,348
Fixed overheads 134,074
Required:
Using the above data, analyse each of the cost variances:
i. Materials
ii. Labour
iii. Variable Overheads
iv. Fixed Overheads

Answer 1

ANSWER:

i) Direct mateiral price variance
Actual Materials price per unit X Actual quantity of Direct material
Less: Standard Direct material price per unit X Actual quantity of Direct materials used
-Direct material price variance
Actual Material Price per unit = 163,455/ 35,464 = $ 4.61 per kg
Standard Direct material price per unit = $4.5 per kg( Given)
Actual Qty : 35,464 Kgs.
Applying in the formula
4.61 X 35,464 = 163489.04
Less: 4.5 X 35,464= 159588
=3901.04
This is an unfavorable variance as actual direct mateials price per unit is more than
the standard direct materials price per unit
Reasons for unfavourable price variance because

• Unexpected change in price of direct materials per unit due to changes in input cost
• Switching of suppliers
• Inaccurate budget estimates
• Corrective Actions
• Order bulk or large quantities to receive higer discounts
• Constant price comparision from existing & new suppliers

Direct materials quantity variance
Standard Direct material price per unit X Actual Quant of Direct materials used
Less: Standard direct materials price per unit x Standard input for actual output
4.5 X 35,464 = 159588
4.5 X 35600 = 160200
= 612
4 kgs standard input for 8900 units of actual output = 35,600)
( Standard input for actual output variance is favorable because actual qty of direct materials used is less than the standard input for actual output ( SIAFAO).
No corrective action as the variance is favorable

ii) Labour Rate variance
Actual Direct labour rate X Actual number of Direct labour hours worked
Less: Standard Direct labor Rate X Actual no of direct labour hours worked
4.94 X 44,100 =  2,17,854
Less : 5 X 44,100 = 2,20,500
= 2646
This is a favourable variance because actual direct labour rate is less than Std labour rate.

Direct labour effiency variance
Standard Direct labour rate X Actual no of direct labour hours worked
Less: Standard Direct labour rate X Standard input for actual output
5 X 44,100 = 220500
: Less: 5 X 44500   = 222500
=   2000
Standard input for actual output is
5 hours X 8900 units produced : 44500
This is favorable because actual hours wworked is less than Standard input &
No corrrective action is needed since it’s a favorable one.

iii) Variable Overhead Spending variance
Actual over head rate X Actual level of activity
Less : Standard Variable Rate X Actual level of activity
Variable spending variance
Actual Overheads =87,348 ( Given )
Less : 10 X 8900 units produced =89.000
( 89000-87348) =1652
This is an favorable Variance

iv) Fixed Overhead Spending Variance
Actual Fixed overhead Rate X Actual Activity = 134074 ( Given )
Less: Budgeted FOH Rate X Budgeted Activity : 15 X 8900 =133500
=574
This is an unfavorable variance as actual is less than budgeted.