Question

QUESTION 3

Cloudsdale plc makes a wide range of motor accessories in a mass production environment. Standard costing is used to control performance and variances are incorporated into weekly management reports using the planning and operational approach. The following data relates to one of their most popular products.

1. The standards set at the beginning of the period include the following:

Selling price per unit                                                           £80

Direct materials price per kilo                                            £5

Direct materials usage per unit                                         7 kilos

Other variable costs (per unit)                                          £20

Budgeted sales (week 4)                                                    48,000 units

2. Information extracted from the reports for the first 3 weeks is given below:

Variances	Week 1	Week 2	Week 3
Materials usage (£)	100,000F	20,000F	45,000A
Materials usage (%)	25	4.2	(2.6)
Materials price (£)	119,000F	32,000F	16,000A
Materials price (%)	6.3	1.2	(0.9)
Sales volume (£)	125,000A	75,000A	75,000A
Sales volume (%)	(9.3)	(5)	(5.8)
Selling price (£)	0	0	219,520A
Selling price (%)	0	0	(5.6)

3. The following information relating to actual results for week 4 is also available:

Total sales                                                                            49,000 units

Average selling price per unit                                            £75.44

Total direct materials used                                                 353,000 kilos

Total direct materials cost                                                  £1.861m

4. Revised standards (set after the 4-week period):

Materials price per kilo                                                        £5.75

Selling price per unit                                                           £78

Required:

1. Calculate direct materials and sales variances for week 4 in monetary and percentage terms, using the revised standards and including planning variances where appropriate.

2. Discuss the results over the 4 week period, commenting on those variances which you deem to be material and any trends which are evident from the results.

Answer 1

a. Calculation of direct materials and sales variances for week 4 in monetary and percentage terms              
   standard Quantity=   £3,36,000       
   standard price=   5.75      
   Actual Quanity=   £3,53,000       
   Actual Price=   5.27       
   Original Cost   £16,80,000.00       
   Actual sales=   49000      
   Budgeted Sales=   48000      
   Budgeted Selling Price=   £78.00       
   Actual Selling Price=   £75.44       
              
              
              
Variances Formula Working Answer  
Material Cost = (standard quantity * Standard Price ) - ( Actual Quantity * Actual Price ) = (336000 * 5.75 ) - (353000 * 5.27) = 71690   F
Material Cost (%) = ( New - Original) / Original = ({336000 * 5.75} - 336000*5) / 336000*5 = 15%  
Materials usage (£)   = (standard Quantity - Actual Quantity) * Standard Price = (336000 - 353000 )* 5.75 = -97750   A
Materials usage (%) =( New - Original) / Original =(353000-353000)/353000 = 0  
Materials price (£)   = (standard Price - Actual Price ) * Actual Quantity   (5.75 - 5.27 ) * 353000 = 169440   F
Materials price (%)   ( New - Original) / Original = (5.75-5)/5 = 15%  
Sales volume (£)   (Actual sales - Budgeted sales) x Budgeted price per unit = (49000-48000)*78 = 78000   F
Sales volume (%)   ( New - Original) / Original = (48000-48000)/48000 = 0  
Selling price (£)   (Actual price – Budgeted price) × Actual Sales = (75.44-78)*49000 = -125440   A
Selling price (%)   ( New - Original) / Original = (78-80)/80 = -2.50%  
              
              
b. Comments              
In material usage variance, there is excessive material used than previous week. Company have to keen eye on material usage & wastage.              
In Material Price Variance, There is Positive increase as Positive variance. Company have to maintain the standards.              
As Selling Price Variance are constantly unfavourable. Company have to check selling price ascertainment. Its pros and cons