Question

A company manufactures and sells one product. At the end of the year, the managers were disappointed that the profit had decreased. The details are:-

                                                            BUDGET                                ACTUAL

                                                                              £                                             £

Sales                                        1 200 units      36 000           1 000 units      40 000

Material (variable cost)              500 kg              3 000              500 kg             3 600

Labour (variable cost)             1 200 hours       12 000           1 100 hours      12 100

Fixed overheads                                                 9 000                                     7 000

Total costs                                                       24 000                                   22 700

Profit / (Loss)                                                  12 000                                   17 300

(a)        Calculate the following variances:_

1. Material price and usage
2. Labour rate and efficiency
3. Overhead spending and volume
4. Sales volume and price

(b)       Prepare a report to explain the difference between the expected profit of £12 000 and        the actual reported profit of £22 700 for the year.

  

2. Discuss the reports that should be provided to the managers of:-
   1. cost centres
   2. profit centres
   3. investment centres

  

Answer 1

Answer A1:

Material Price Variance = (Actual Price- Standard Price)*Actual Quantity Used

Material Price Variance = [(3600/500)-(3000/500)] * 500

Material Price Variance = (7.2 - 6.0) * 500

Hence, Material Price Variance = 600 Unfavorable

Materail Usage Variance = (Actual Usage- Standard Usage) * Standard Price

Variance = (500 - 500) * 6

Hence, Material Usage Variance = Zero

Answer A2:

Labour Rate Variance = (Actual Rate- Standard Rate) * Actual Hours Worked

Variance = [(12,100 /1,100) - (12,000 /1,200) * 1,100

Variance = (11 - 10) * 1,100

Hence, Labour Rate Variance = 1,100 Unfavorable

Labour Effeciency Variance = (Actual Hours - Standard Hours) * Standard Rate

Variance= ( 1,100 - 1,200) * 10

Hence, Labour Effeciency Variance = 1,000 Favorable

Answer A3:

Overhead Spending Variance = Actual Fixed Overhead - Budgeted Fixed Overhead

Variance = 7,000 - 9,000

Hence, Overhead Spending Variance = 2,000 Favorable

Overhead Volume Variance = Absorbed Overhead Cost - Budgeted Overhead Cost

Absorbed Overhead Cost is the budgeted overhead cost per unit for Actual Quantity

Variance = [ ( 9000/1200 ) * 1000 ] - 9,000

Hence, Overhead Volume Variance = 1,500 Unfavorable

Answer A4:

Sales Volume Variance = (Actual Units Sold - Budgeted Units Sold) * Budgeted Sales price per unit

Variance = (1,000 - 1,200) * (36,000/1,200)

Hence, Sales Volume Variance = 6,000 Unfavorable

Sales Price Variance = (Actual Price - Budgeted Price) * Actual Unit Sales

Variance = [ (40,000/1,000) - (36,000/1,200) ] * 1,000

Variance = (40 - 30) * 1000

Hence, Sales Price Variance = 10,000 Favorable