Question

ABC Limited is a family owned business that has been in operation for the past ten years. The
company based in Kabwe manufactures one product: desks.
ABC limited Managing Director, Mr. Aubrey Bwalwa Chuungu has been away on a business trip
to China for the past three months. He is worried that the current outbreak of the Corona virus
and the subsequent restrictions imposed on commerce by the Zambian government may have had
adverse financial consequences for the company.
You are the Management Accountant of ABC Limited.
On his return, Mr. Chuungu , who is a non-finance specialist, has requested a financial review of
the company’s financial performance for the last month , May 2020 in order to put his fears to
rest.
You have just received an email from Mr. Chuungu to conduct a financial performance analysis
for the month May, 2020.
You have retrieved the following computer printout from the company’s management accounts
for the month of May, 2020:
Actual Budget
Sales volume 4,900 units 5,000 units
Selling price per unit K11.00 K10.00
Production volume 5,400 units 5,000 units
Direct materials:
Quantity 10,600 kg 10,000 kg
Price per kg K0.60 K0.50
Direct labour:
Hours 2,970 2,500
Rate per hour K3.80 K4.00
3
Fixed overheads:
Production K10, 300 K10, 000
Administration K3,100 K3,000
ABC Limited uses a standard absorption costing system, absorbing overheads into products
using labour hours.
There was no opening or closing work-in-progress for the month of May,2020.
Required:
(a) Prepare a statement that reconciles the budgeted profit with the actual profit for the
month of May, 2020, showing individual variances in as much detail as possible.

Answer 1

Calculation of Variances :

Material Variances

sQ = standard quantity for Actual output =

= (10000÷5000)*5400 = 10800 kgs

S.p = 0.5/kg

AQ consumed = 10600 kgs

A.P /kg = 0.6/kg

Material price variance = ( S.P-A.P) * AQ consumed

= ( 0.5-0.6)*10600kgs = 1060 U

Material Usage Varinace = ( Sq-Aq) *S.P

= ( 10800-10600 ) * 0.5/kg = 100F

Labour Varinace :

S.H = standard hours for Actual output

= (2500hrs/10000units)*5400 units = 2700 hours

S.R = standard rate per hour = 4/hr

A.R = Actual Rate per hour = 3.8/hr

A.H = Actual hours = 2970 hrs

Rate variamce = ( S.R-A.R) * A.H =

= ( 4-3.8)*2970hrs = 594 F

Efficiency Variance = ( S.H-A.H)*S.R/hr

= ( 2700-2970)*4 = 1080 U

Fixed Production overheads variance :

volume Variance :

S.R/hr = 13400$/2500hrs = 5.2/hr

Absorbed O.H = Standard hrs for Actual output*S.R/hr

= 2700hrs * 5.2/hr = 14040

Budgeted O.H = standard hours for budgeted output *S.R/hr

= 2500hrs*5.2/hr = 13000

Fixed O.H volume Variance = absorbed O.H- Budgeted O.H

= 14040-13000 = 1040 F

Fixed O.H expenditure variance=Budgeted O.H - Actual O.H

= 13000 - 13400 = 400 U

sales Varinace :

Standard cost /unit

Material. = 1k/unit

Labour. = 2/unit

Fixed O.H = 5.2/2hr. = 2.6/unit

Standard cost/unit. = 5.6/unit

Budgeted margin = 10-5.6 = 4.4/unit

Actual margin = 11-5.6 = 5.4/unit .

Sales margin volume Variance :

( AQ-BQ)*BM =

( 4900-5000)*4.4/UNIT = 440 U

Sales margin price Varinace :

( AM-BM)*AQ = (5.4-4.4)*4900 UNITS = 4900F

Reconciliation Statement :

Budgeted profit = ( 5000*4.32 ). = 21600

Sales margin volume Varinace. = 440 U

Standard profit for Actual profit = 21168

Sales margin price Varinace. = 4900 F

Material Usage variance = 100F

Material price variance. = 1060 U

Labour effecinecy Varinace = 1080 U

Labour rate varinace. = 594 F

Fixed O.H Varinace

Volume Varinace. = 1040 F

Expenditure Varinace. = 400 U

Actual profit. = 25262.