Question

Anderson Ltd. manufacture gearboxes for use in cars. At the start of the

year, the management of Anderson Ltd. estimated that its costs would be:

This was based on the following:

Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead

8 50 8 12 5

80 employees

2000 hours worked by each employee

40 000 gearboxes manufactured in the year as budgeted production

£200 unit selling price.

You have recently been employed by the company to establish a standard

costing system. At the end of the year you were able to extract the

following information:

• labour costs £4.40/hour

• 32 000 units sold

• £210/unit selling price

• 160 000 hours were worked

• variable production overheads were £640 000

• fixed production overheads were £810 000

• administration costs were £350 000

• raw material prices were 10% higher than expected

• total expenditure on raw material was £3.696 M

• there were no opening or closing stocks of raw materials.

(a) You are required to prepare an operating statement for the year, using

a standard absorption costing system.

Calculations should proceed according to the following headings

suffixing ‘A’ for Adverse and ‘F’ for Favourable where appropriate.

Resulting quantities required for the statement are then entered in the

‘Operating Statement for the Year’ sheet shown on page 6.

(All working must be shown.)

(Budgeted) Costs

Unit cost

£

Direct labour

Direct materials

Variable overhead

Fixed overhead

Admin. overhead

Total

Selling price

Standard profit (per unit)

Budgeted profit

Sales price variance

Sales quantity variance

Cost Variances

Labour Variances

Standard hours =

Standard cost/hour =

Rate variance =

Standard time =

Actual time =

Time variance =

Efficiency variance =

Material Variances

Material price =

Material usage      – standard =

– actual =

Material usage variance =

Variable overheads

Standard cost =

Actual cost =

Expenditure variance =

Efficiency variance =

Fixed overheads

Expenditure variance =

Volume variance =

Admin overhead (treat as fixed)

Expenditure variance =

Volume variance =

Operating Statement for the Year

£’000 £’000

Budgeted Profit

Sales variance      – price

– quantity

Cost variances

Labour                  – rate

– efficiency

Material                – price

– usage

Variable                – expenditure

– efficiency

Fixed                    – expenditure

– volume

Admin                  – expenditure

– volume

Actual Profit

(b) Give reasons/explanations why the variances in (a) above have

occurred for the following:

(i) material price

(ii) labour efficiency

(iii) fixed overhead expenditure.

(c) The accountant suggests that a standard marginal costing system may

be more suitable. He asks you to outline the strengths and

weaknesses of both systems and recommend the most suitable.

(d) The Board of Anderson Ltd. want to adopt ‘ideal’ standards because

they feel it will encourage harder work. You are asked to produce a

brief report giving your views.

Answer 1

Solution: In the given above problem has multiple parts having multiple sub parts. so, I Have answered the parts relating to a) Labour Cost Variances

b) Material Cost Variances

a) Calculated as per Labour Cost Variances

Particulars	Formula	working	Amount
Standard Hours		80X2,000	160,000
Standard Cost/Hour		200X8%X.25	4
Rate Varaince	Actual HoursX(Actual rate - Standard Rate)	160,000X(4.40 - 4)	64,000 (U)
Standard Time		assumed for actual production	128,000
Actual Time			160,000
Time Variance	Actual Time - Standard Time		32,000 (U)
Efficiency Variance	Standard Rate X (Actual Hours - Standard Hours for Actual Production)	4X(160,000 - 32,000X160,000/40,000) or 32,000X4	128,000 (U)

Note:In this Labour cost variance , F indicates favorable variance and U indicates unfavorable variance.

b) Calculated as per Material Cost Variances

Particulars	Formula	working	Amount
Material Price Variance (MPV)	Actual Material X (Actual Rate - Stadard Rate)	369,600,0/110X(110-100)	336,000 (U)
Material Usage Variance (MUV)	Standard Rate X (Actual Material - Standard Material for Actual Production)	100X(33,600-32,000)	160,000 (U)

Note:# In this Material cost variance , F indicates favorable variance and U indicates unfavorable variance.

#Standard Material Rate = Selling Price*50% = 200*50% = 100

#Standard material is assumed to be 1 per unit. Therefore, standard material used for actual production would be 32,0000 (32,000*1).