Question

Question – 3                                                                                                     30 Marks

Plastic Manufacturing Company:

Plastic Manufacturing Company manufactures Plastic Cartons. The Competition in the plastic industry is increasing. The production manager of the company is suggesting using standard costing system. He explains “Standard costing is a control technique where actual and standard costs and revenues are compared to obtain the variances and are used as an important tool to improve the performance”

The company has the following standard cost card to manufacture each plastic carton.

Direct material– 2.5 Kg. at OMR 5 per kg.                       12.5

Direct Labor – 3 hours at OMR 4 per hour                      12

Fixed Overheads - 3 hours at OMR 2 per hour                6

Total standard cost                                                            30.5

Selling price                                                                       45.5

Standard profit                                                                 16

Budgeted sales(units)                                                                  900

Actual cost and revenue are as follows:

Actual production for the period was 830 units

Direct material       2200 kg          costing     OMR 10500

Direct labour          2300 hours     costing   OMR 9500

Actual sales are 750 Units and sold @ OMR 55

1. Calculate:

1. Material Price Variance
2. Material Usage variance
3. Labor Rate Variance
4. Labor Efficiency Variance
5. Sales price variance
6. Sales volume Profit variance                                                              18 Marks

2. Explain possible reasons and interrelationship for labou , material and sales variances calculated in part (a) above.                                                                                              6 Marks

3. As suggested by Production manager standard costing(Variance analysis) is a tool for control. Evaluate the Advantages of Variance Analysis for the organization.     6 Marks

Note - The academic reference is required for part (C) of the above question

Answer 1

Actual Production = 830 units

Standard Direct Material = 830 Units * 2.5 kg = 2075 kg

Standard Direct Material Cost = 2075 kg * 5 per kg = 10375

Standard Direct Labor Hours = 830 Units * 3 hour = 2490 hours

Standard Direct Labor Cost = 2490 hours * 4 per hour = 9960

A)-1. Material Price Variance = Actual Material Use * (Actual Direct Material Per Kg - Standard Direct Material Per Kg)

= 2200 Kg * ((10500/2200 units) - 5 Per Kg)

= 2200 Kg * (4.77 Per Kg - 5 Per Kg)

= 500 F

2. Direct Material Usage Variance :-

= Standard Direct Material Price Per kg * (Standard Direct Material Use - Actual Direct Material Use)

= 5 * (2075 - 2200)

= 5 * 125

= 625 U

3. Direct Labor Rate Variance = Actual Hours * (Actual Direct Labor Rate Per Hour - Standard Direct Labor Rate Per Hour)

= 2300 * ((9500/2300) - 4 per hour)

= 2300 * (4.1304 per hour - 4 per hour)

= 300

4. Direct Labor Efficiency Variance = Standard Direct Labor Rate Per Hour * ( Actual Hours - Standard Hours)

= 4 per hour * (2300 hours - 2490 hours)

= 4 per hour * 190

= 760 F

5. Sales Price Variance = Actual Sales * (Actual Sale Price Per Unit - Standard Sale Price Per Unit)

= 750 Units * (55 - 45.5)

= 750 Units * 9.5

= 7125 F

6. Sales Volume Profit Variance = Standard Profit Per Unit * (Actual Sales Units - Budgeted Sales Units)

= 16 per unit * (750 - 900)

= 16 per unit * 150 units

= 2400 U