Question

Belinda, trading as ‘Busy Bees’ has been making soap from natural ingredients and selling it at local markets for several years. As the demand for natural products and eco-friendly packaging has increased, Belinda has decided to expand into a range of household cleaning products. She has recently moved from her own kitchen into a small rented factory and now employs three hourly paid workers.

The table below shows the expected costs of one of Busy Bees’ new products:

	£
Quantity to be produced	21 batches of 20 units
Direct materials - beeswax	200g per unit at 2 pence per gram
Direct materials - other	100g per unit at 1 pence per gram
Direct labour	1 hour per batch of 20 at £12 per hour
Packaging	60cm per unit at 25pence per metre

The actual results for the new product in its first month of production are shown in the table below:

	£
Quantity produced	386 units
Direct materials - beeswax	£2,316 at 1.95pence per gram
Direct materials - other	£386
Direct labour	£463 at £12 per hour
Packaging	£58

Required:

a) Produce a table showing the flexed budget and variances between the flexed budget and actual expenditure.

b) Calculate the variances for price and usage of beeswax.

c) Calculate the variances for rate and efficiency of direct labour.

d) Suggest actions that Belinda might take to improve future performance based on the variances calculated.

e) Describe the ways in which Belinda may be able to use learning curve theory to predict future production costs.

Answer 1

a) Calculation of flexible budget variance

Particulars	Actual data	Flexible budget data	Flexible budget variance (Actual-Flexible)
Quantity produced	386 units	386 units	-
Direct materials- Beeswax	£ 2316	£ 1544	£ 772 Unfavorable
Direct materials - Others	£ 386	£386	-
Direct labor	£ 463	£ 240	£ 223 Unfavorable
Packaging	£ 58	£ 57.9	£ 0.1 Unfavorable
Total costs	£ 3223	£ 2227.9	£ 995.1 Unfavorable

*) Flexible budget cost for Bee wax = Actual production * Standard quantity required per unit * standard cost

= 386units * 200g.*2 pence = £ 1544

Flexible budget variance for direct materials- Beeswax is an unfavorable variance because actual expense is greater than budgeted.

*) Flexible budget Direct materials – Others cost = Actual production * Standard quantity required per unit * standard cost

= 386units * 100g. per unit * 1 pence per g. = £386

*)

Number of batches in actual production = Actual production/ budgeted batch size

= 386 units/ 20units = 19.3 that is 20 batches (Assuming that batches can’t be taken as a fraction)

Flexible budget cost for Direct labor = number of batches * hours required per batch * standard cost

= 20 batches * 1 hour * £ 12 per hour = £ 240

Flexible budget variance of Direct labor is an unfavorable variance because actual expense is greater than budgeted.

*) Flexible budget cost for packaging = Actual units * Standard quantity required per unit * standard cost

= 386 units * 60cm per unit * 25 pence per meter

= £ 57.9

Flexible budget variance for packaging an unfavorable variance because actual expense is greater than budgeted.

b)

Actual usage of Beeswax(AQ) = Total cost/ Actual price per gram

= £ 2316 / 1.95 pence per gram = 118769.23g. = 118770g. (Rounded off)

Actual price (AP) = 1.95 pence per gram

Standard quantity required for actual production (SQ) = Actual production * Standard quantity required per unit

= 386 units * 200g. per unit = 77200g.

Standard price (SP) = 2 pence per gram

Usage variance for beeswax= (AQ –SQ) * SP

= (118770 - 77200g.) *2 = 83140 pence = £ 831.4 Unfavorable (Actual quantity is greater than the standard so variance will be favorable)

Price variance for beeswax = (AP-SP) * AQ

= (1.95-2)* 118770 = 5938.5 pence= £ 59.39 Favorable

(Actual price is less than the standard so variance is favorable)

c)

Actual rate of direct labor (AR) = £ 12 per hour

Actual hours used (AH) = Actual cost/ Actual rate per hour

= £ 463/ £12 = 38.59 hours

Standard hours required for actual production (SR) = number of batches * standard hours required per batch

= 20 batches * 1 hour per batch = 20 hours

Standard rate per hour (SR) = £ 12 per hour

Direct labor efficiency variance = (AH-SH) * SR

= (38.59-20) *12= £ 223.08 Unfavorable

(Actual hours is exceeding the standard so variance will be unfavorable)

Direct labor rate variance = (AR-SR)*AH

= (12-12) * 38.59 = 0

d)

As per flexible budget variance report material cost for beeswax and direct labor cost producing significant variance. By further analyzing the variances we can understand that beeswax usage and labor efficiency variance are causing the major part of this variance, because both of these variances are deviating significantly from the standards. And material price variance is favorable. So we can assume that the company may be using cheap beeswax that having an inferior quality because of that the labor hours are increasing form the budgeted. So company should investigate its labor working and usage of beeswax. Company should ensure that both of these are working properly. Belinda trading should carefully select their supplier for beeswax, for delivering quality raw material. And shouldn’t compromise in the quality for the reduction in the price. And the company should monitor their workers, because they may be inefficient or unfamiliar with the process, that may be the one of the reasons for the increase in the usage of material. So the Belinda should consider this also.

e)

Learning curve is the graphical representation of the rate of learning of a given task over time. It shows the rate of learning taking place as a result of gaining experience in doing a task. It is also called productivity curve, efficiency curve, cost curve and experience curve as it provides insight into production, efficiency, cost and experience. Learning curve is based on the concept that a person or worker may take longer time to complete a task initially but when the same task is repeatedly done, there happens learning and gains experience, so the time taken for upcoming tasks will be lower than the initial time taken. As the unit of production doubles, the time taken to produce one unit keeps on declining at the learning curve rate. Learning curve rate ranges between 50% to 100%. A 100% learning curve rate shows no learning taking place.

There are various uses of learning curve. This is mainly used for estimation. As the learning curve rate is known we could predict the time for completing jobs and their associated costs. The employees become more efficient and subsequently production increases. So, we could estimate the increase in production and plan accordingly to meet the requirements for materials, labor and other resources needed. Learning curve is also helpful in managing the production costs. As the employees becomes more and more efficient the time and cost required for production will also reduce. As they gain experience, the time taken reduces, material wastages will be lower and other related costs also decreases. Through learning curve, a business could manage its production costs. The learning curve is used in projecting, estimating and forecasting future costs or the rate at which these costs are expected to fall due to learning.