Question

QUESTION 4   20 MARKS

Namtech Ltd, is an electronics company which makes two types of televisions – plasma screen TV and LCD TV. It operates within a highly competitive market and is constantly under pressure to reduce prices. Namtech Ltd operates a standard costing system and performs a detailed analysis of both products on a monthly basis.

Extracts from the management information for the month of November are as follows;

Notes Total number of units made and sold 1400 1 Material Price Variance N$ 28 000 (Unfavourable) 2 Total Labour Variance N$ 6 050 (Unfavourable) 3

Notes; 1. The budgeted total sales volume for the TVs was 1180 units, consisting of an equal mix of plasma screen TVs and LCD screen TVs. The actual sale volume was 750 plasma TVs and 650 LCD TVs. Standard sales prices are N$ 350.00 per unit for the plasma TVs and N$ 300.00 for the LCD TVs. The actual sales prices achieved during November were N$ 330.00 per unit of plasma TVs and N$ 290 per unit for the LCD TVs. The standard contribution for plasma TVs and LCD TVs are N$ 190.00 and N$ 180.00 respectively.

2. The reason for this variance was an increase in the purchase price of its key components, Gammer. Each plasma TV and each LCD TV made requires one unit of component Gammer for which Namtech Ltd standard cost is N$ 60.00 per unit. Due to a shortage of components in the market, the market price for November went up to N$ 85.00 per unit of Gammer. Namtech actually paid N$80.00 per unit for it.

3. Each Plasma TV uses two standard hours of labour and each LCD TV uses one and a half standard hour of labour. The standard cost for the labour is N$ 14.00 per hour and this also reflects the actual cost per labour for the company permanent staff in November. However because of the increase in the sales and production volumes in November, the company also had to use additional temporary labour at a higher cost of N$ 18.00 per hour. The total capacity of Namtech Ltd permanent workforce is 2 200 hours production per month, assuming full efficiency. In the month of November, the permanent workforce were wholly efficient, taking exactly two hours to complete each plasma TV and exactly one and a half hour to produce each LCD TV. The total labour variance therefore relates solely to the temporary workers, who took twice as long as the permanent workers to complete their production.

REQUIRED:

4.1 Calculate the Sales Price Variance      (2) 4.2 Calculate the Sale Volume Contribution Variance   (2) 4.3 Calculate the Material Price Planning Variance     (2) 4.4 Calculate the Material Price Operational Variance   (2) 4.5 Calculate the labour Rate Variance     (3)   4.6 Calculate the Labour Efficiency Variance    (3) 4.7 Explain any three reasons why the company will be interested in computing the variances in 3.3 and 3.4   

Answer 1

Sales Price Variance
= Actual Sales Units × Actual Price
– Actual Sales Units × Budgeted Price

Sales Price Variance

Product	Plasma TV	LCD T
Actual Price	330	290
Actual Units	750	650
Total Actual Revenue	247,500	188,500	436,000
Budgeted Price	350	300
Budgeted Units	590	590
Total Budgeted Revenue	206,500	177,000	383,500
Sales Price Variance			52,500Favourable

Sale Volume Contribution Variance

Product	Plsma TV	LCD TV
Actual Unit	750	650
Budgeted Unit	590	590
Difference	160	60
Standard Contribution	190	180
Sales Volume Contribution Variance	30,400	10800	412,000 Favourable

Material Price Planning Variance

Standard Price	60/unit
Revised Standard Price(not Paid)	85/unit
Difference*	(-25)
Actual Quantity(750+650)	1400
Material Price planning Variance	(35,000) Unfavourable

Material Price Operational Variance

Product	Plasma
Actual Cost	80
Units(750+650)	1400
Actual Result		112,000
Revised Standard Price(not paid)	85
Actual Units	1400
Revised Flexed Budget		119,000
Material Price Operational Variance		7,000Favourable

No Variance for permanent Workers

Hours needed =750*2Hours= 1500 and 650*1.5=1.5=975 Total=2475

Permanent Work Force.................................=2200

Temporary force------------------------------=2475-2200=275

But they Took Twice 275*2 =550

So actual Hours was 2200permanent+ 550Temporary = 2750

Labour Rate Variance = (Std Rate - Actual Rate)*Actual Hour

------------------------------=(14-18)*550 =(2,200) Adverse

or

Actual Labour Cost (2200*14 + 550*18) ........ =40,700

Actual hours at standard cost = 2750 x $14 = (38,500)

Labour Rate Variance-------------------------------=(2200)

Labour Efficiency Variance

As permanent Work Force At full Capacity variance only for teporary

Labour efficiency variance = (standard labour hours for actual production – actual labour hours worked) x standard rate.

............................................=(275 – 550) x $14 =(3,850) Aderse

(3) Eventhough question asked3.3 &3.4 I think it on 4.3 and 4.4

Use of planning and operational variances

Change in market conditions can leading to an increase in price and change in market conditions is not within the control of the purchasing department. So need to calculate split in Material Price Variance to Planning and Operational.

The planning variance represents the uncontrollable element

While , operational variance represents the controllable element

Planning Variance defines how well Predicted but Operational Variance Dhows How efficent Purchase department is.