Question
In: Accounting
Standard costing Thomas Ltd makes a standard product, which sells at £5 a unit. It’s budget...
Standard costing
Thomas Ltd makes a standard product, which sells at £5 a unit. It’s budget and actual figures for a month are as follows;
Budget
Production for the month 5000 units
Direct materials (0.5kg at £3) £7,500
Direct Labour (15 minutes at £5/hour) £6,250
Fixed overheads £6,000
Actual
Production for the month 5400 units
Labour hours for month 1300 hours
Labour cost for month £6,885
Materials used in month 2,830kg
Materials cost for month £8,770
Fixed overheads £6,350
Actual Operating Profit £4,455
There was no existing stock at the start of the month.
Required:
a) Prepare a flexed budget for the month, showing expected profit.
b) Calculate standard costing variances for the month and reconcile the budgeted and actual profit figures.
Solutions
Expert Solution
Answer :
a) Preparation of flexible budget
| Particulars | Budgeted results | Actual results | Flexible budget | Calculations |
| Units produced | 5,000 | 5,400 | 5,400 | |
| Selling price per unit | £ 5 | £ 4.9 | £ 5 | |
| Sales revenue | £ 25,000 | £ 26,460 | £ 27,000 | |
| Less : Variable cost | ||||
| Material cost | £ 7,500 | £ 8,770 | £ 8,100 | (7500/5000) x 5400 |
| Labour cost | £ 6,250 | £ 6,885 | £ 6,750 | (6250/5000) x 5400 |
| Contribution | £ 11,250 | £ 10,805 | £ 12,150 | |
| Less : Fixed cost | £ 6,000 | £ 6,350 | £ 6,000 | |
| Net profit | £ 5,250 | £ 4,455 | £ 6,150 |
Note :1) Calculation of Actual selling price per unit
Actual net profit = 4,445
Fixed costs = 6,350
Contribution = Net profit + Fixed cost = 4,445 + 6,350 = 10,795
Actual Material cost = 8,770
Actual labour cost = 6,885
Sales revenue = Contribution + Material cost + labour cost = 10,795 + 8,770 + 6,885 = 26,450
Units sold = 5,400
Selling price per unit = Sales revenue / Units sold = 26,450 / 5,400 = 4.9
b) Calculation of Standard costing variances
| Particulars | Budgeted results | Standard results | Actual results | Standard costing Variances | Calculations |
| Units produced | 5,000 | 5,400 | 5,400 | ||
| Selling price per unit | £ 5 | £ 5 | £ 4.9 | ||
| Sales revenue | £ 25,000 | £ 27,000 | £ 26,460 | (540) | (Actual - Standard) |
| Less : Variable cost | |||||
| Material cost | £ 7,500 | £ 8,100 | £ 8,770 | (670) | (Standard - Actual) |
| Labour cost | £ 6,250 | £ 6,750 | £ 6,885 | (135) | (Standard - Actual) |
| Contribution | £ 11,250 | £ 12,150 | £ 10,805 | 900 | (Standard - Budgeted) |
| Less : Fixed cost | £ 6,000 | £ 6,000 | £ 6,350 | (350) | (Standard - Actual) |
| Net profit | £ 5,250 | £ 6,150 | £ 4,455 | 1,695 | (Standard - Actual) |
Reconciliation of Budgeted profit with actual
profit
| Particulars | Amount |
| Budgeted profit | £ 5,250 |
| Less : sales revenue variance | (540) |
| Less : Material cost variance | (670) |
| Less : Labour cost variance | (135) |
| Add : Contribution margin Variance | 900 |
| Less : Fixed cost variance | (350) |
| Actual Profit | £ 4,455 |
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