Question

Standard costs for X Limited along with actual data for the last period is given below.
Standard costs and revenues (per unit of product Alpha):
Direct Materials: Rs.
4 kg of X at Rs. 20 per kg 80
2 kg of Y at Rs. 30 per kg 60
Direct Labour:
6 hours at Rs. 18 per hour 108
Variable Overheads:
6 direct labour hours at Rs. 4 per hour 24
Standard contribution margin 80
Standard Selling Price 352
Budgeted fixed overheads for the period are Rs.480,000.
Actual results are as under. 18,000 units were produced and sold during the period.
Rs. Rs.
Sales 6,480,000
Direct Materials:
X: 76,000 kg at Rs. 22 per kg 1,672,000
Y: 40,400 kg at Rs. 28 per kg 1,131,200
Direct Labour: -
114,000 hours at Rs. 19.2 per hour 2,188,800
Variable Overheads: 416,000 5,408,000
Contribution margin 1,072,000
Fixed Overheads: 464,000
Profit 608,000
Required:
a) Prepare a budget for an activity level (sale and production) of 20,000 units.
b) Based on variable costing method, calculate all the variances, that you consider
important to assess the performance of the company.
c) Give the probable reasons to each variance. Also point out the manager/department
responsible for the occurrence of that variance.

Answer 1

a) Statement showing the budget for an activity level (sale and production) of 20,000 units:

Item	Calculations	Planning budget
Budgeted Production and Sales (in units)	20,000 units
Sales Revenue	20,000 units @ 352	Rs. 7,040,000
Expenses:
Direct materials cost:
Direct materials X	20,000 units @ 80	1,600,000
Direct materials Y	20,000 units @ 60	1,200,000
Direct labor cost	20,000 units @ 108	2,160,000
Variable Factory Overheads	20,000 units @ 24	480,000
Fixed Factory Overheads		480,000
Total Costs		5,920,000
Net Operating Income		Rs. 1,120,000

b) Calculation of all variances:

Standard data for 18,000 units is

	Standard quantity or hours	Stanadard Price or Rate	Standard Cost/ Revenue
Budgeted Sales revenue	18,000 units	Rs. 352	Rs. 6,336,000
Direct materials:
Direct materials X	72,000 Kg (18,000 x 4 kg)	Rs. 20	1,440,000
Direct materials Y	36,000 Kg (18,000 x 2kg)	Rs. 30	1,080,000
Direct labor	108,000 Hr. (18,000 x 6Hr.)	Rs. 18	1,944,000
Variable factory overhead	108,000 Hr. (18,000 x 6Hr.)	Rs. 4	432,000
Standard Variable cost of 18,000 units		Rs. 4,896,000
Standard contribution margin	Rs. 80 (352 - 272)	1,440,000
Budgeted Fixed Overhead			480,000
Budgeted Net Operating income		Rs. 960,000

	Actual quantity or hours	Actual Price or Rate	Actual Cost
Sales revenue	18,000 units	Rs. 360	Rs. 6,480,000
Direct materials:
Direct materials X	76,000kg	Rs. 22	1,672,000
Direct materials Y	40,400kg	Rs. 28	1,131,200
Direct labor	114,000 Hr.	Rs. 19.2	2,188,800
Variable factory overhead	114,000 Hr.	Rs. 3.65*	416,000
Actual Variable cost of 18,000 units		Rs. 5,408,000
Actual contribution margin		Rs. 1,072,000
Actual Fixed Overhead			Rs. 464,000
Actual Net Operating income		Rs. 608,000

*Actual variable overhead rate per hour = Rs. 416,000 / 114,000 = Rs. 3.65 (approx.)

Actual selling price per unit = Rs.6,480,000 / 18,000 = Rs. 360 per unit

b) Variance Analysis:

	Flexible Budget	Revenue and Spending Variances	Actual Results
Production and sales (in units)	18,000 units		18,000 units
Sales Revenue	6,336,000	144,000 (F)	6,480,000
Expenses:
Direct materials cost:
Direct materials X	1,440000	232,000 (U)	1,672,000
Direct materials Y	1,080,000	51,200 (U)	1,131,200
Direct labor cost	1,944,000	244,800 (U)	2,188,800
Variable Factory Overheads	432,000	16,000 (F)	416,000
Fixed Factory Overheads	480,000	16,000 (F)	464,000
Total Costs	5,376,000	496,000 (U)	5,872,000
Net Operating Income	Rs. 960,000	Rs. 352,000 (U)	Rs. 608,000

1. Sales price variance = (Budgeted selling price - Actual selling price) x Actual quantity sold

= (352 - 360) x 18,000 = Rs. 144,000 (F) Favorable

2. Material price variance = (Standard price - Actual price) x Actual Quantity of material

Material Usage Variance = (Standard quantity - Actual quantity) x Standard price per material

Material price variance of X = (20 - 22) x 76,000 = Rs. 152,000 (U) Unfavorable

Material Usage Variance of X = (72,000 - 76,000) x Rs. 20 = Rs. 80,000 (U) Unfavorable

Total variance of Materials X = 152,000+80,000 = Rs. 232,000 (U) Unfavorable

Material price variance of Y = (30 - 28) x 40,400 = Rs. 80,800 (F) Favorable

Material Usage Variance of Y = (36,000 - 40,400) x Rs. 30 = Rs. 132,000 (U) Unfavorable

Total variance of Materials Y = 80,800-132,000 = Rs. 51,200 (U) Unfavorable

3. Labor rate variance = (Standard rate - Actual rate) x Actual labour hours

= (18 - 19.20) x 114,000 = Rs. 136,800 (U) Unfavorable

Labour Efficiency Variance = (Standard labour hours - Actual labour hours) x Standard rate per labour hour

= (108,000 - 114,000) x 18 = Rs. 108,000 (U) Unfavorable

Total variance of Direct labor = 136,800 + 108,000 = Rs. 244,800 (U) Unfavorable

4. Varaible overhead rate variance = (Standard rate - Actual rate) x Actual variable overhead hours

= (4 - 3.65) x 114,000 = Rs. 40,000 (F)

Varaible overhead Efficiency variance = (Standard labour hours - Actual labour hours) x Standard rate per variable hour

= (108,000 - 114,000) x 4 = Rs. 24,000 (U) Unfavorable

Total variance of Direct labor = 40,000 - 24,000 = Rs. 16,000 (U) Unfavorable

5. Fixed overhead Expenditure variance = Budgeted fixed overhead cost - Actual fixed overhead cost

= 480,000 - 464,000 = Rs. 16,000 (F) Favorable

c) Reasons for each variances and person/ department responsible for it:

Sales Variances = Favorable sales price variances as the actual selling price is higher than the budgeted selling price per unit. Sales manager is responsible for the favorable variance.

Direct materials X = Unfavorable variance of Rs. 152,000 for price differences and Rs. 80,000 for usage differences. Purchase manager is responsible for material price varainces and Production manager is responsible for materials usage variances.

Direct materials Y = Favorable variance of Rs. 80,800 for price differences and unfavorable variances of Rs. 132,000 for usage differences. Purchase manager is responsible for material price varainces and Production manager is responsible for materials usage variances.

Direct labor = Unfavorable variance of Rs. 136,800 for labor rate differences and Rs. 108,000 for labor efficiency differences. Hiring manager is responsible for labor rate varainces and Production manager is responsible for labor efficiency variances.

Variable and Fixed factory overhead = Production department is responsible for the variances in the variable factory overhead.