Question

The Ultimate Chef Ltd manufactures food processors.  Their standard cost information for one food processor is:

				£
Materials	2kg @	£9.00	per kg	18
Direct Labour	1 hours @	£16.00	per hour	16
Variable overheads	1.5 hours @	£12.00	per hour	18
				£52

Budget information for November 2019:

Budgeted selling price per food processor is £85.

Budgeted sales volume was 3,000 units.

Actual information for November 2019:

3,400 units were produced and sold generating £272,000 revenue.

6,100kg of materials were used costing £57,950.

2,900 hours of labour were worked costing £48,575.

£51,000 of variable overheads were incurred.

£30,000 of fixed overheads were incurred.

Requirement:

1. Calculate the following variances, stating clearly whether the variance is adverse of favourable:

1. Materials price variance
2. Materials usage variance
3. Labour rate variance
4. Labour efficiency variance
5. Sales price variance
6. Sales margin volume variance

2. Write a short report to management explaining potential reasons for the variances calculated in part (a).

3. Describe some of the actions management can take to ensure budgetary control is effective.

Total: 25 marks

Answer 1

The Ultimate Chef Ltd manufactures food processors.  Their standard cost information for one food processor is:

				£
Materials	2kg @	£9.00	per kg	18
Direct Labour	1 hours @	£16.00	per hour	16
Variable overheads	1.5 hours @	£12.00	per hour	18
				£52

Budget information for November 2019:

Budgeted selling price per food processor is £85.

Budgeted sales volume was 3,000 units.

Actual information for November 2019:

3,400 units were produced and sold generating £272,000 revenue.

6,100kg of materials were used costing £57,950.

2,900 hours of labour were worked costing £48,575.

£51,000 of variable overheads were incurred.

£30,000 of fixed overheads were incurred.

.

A. Calculate the following variances, stating clearly whether the variance is adverse of favourable:

1. Materials price variance

Is the difference between actual price and standard price to actual volume uned in the production

Materials price variance = Actual cost incurred(AQ * AP) - Standard cost to actual units (AQ * SP )

Materials price variance = 57950 - (6100 * 9)

Materials price variance = 57950 - 54900 = 3050 U

**Actual cost are higher than standard cost, so Unfavorable

..

2. Materials usage variance

It is the difference between Actual quantity used and standard set for production to standard price

Materials usage variance = ( AQ - SQ ) * SP

Where,

AQ = actual quantity = 6100 kg

SQ =standard quantity = 2 kg for actually produced units of 3400 = 2 *3400 =6800

SP = standard price per kg = 9

Materials usage variance = ( 6100 - 6800 ) * 9 = 700 * 9 = 6300 F

*Actually used is less than standard, so favorable variance

,

3. Labour rate variance

It is the difference between Actual rate and standard rate of actual direct labor hour used in the production

Labour rate variance = (actual qty * actual rate ) - (actual qty * standard rate)

Labour rate variance = 48575 - ( 2900 * 16) = 48575 - 46400 = 2175 U

*Actual incurred rate was higher than standard set for actual production, so Unfavorable.

.

4. Labour efficiency variance

It is the variance that is difference between actual direct labor hour worked and standard hours for actual production to standard rate

Labour efficiency variance = ( AQ - SQ ) * SP

Where,

AQ =actual hours = 2900 hours

SQ = standard hours set for actual production = 1 hour per units of 3400 total units = 1 * 3400 = 3400

Sp = standard rate = 16

Labour efficiency variance = ( 2900 - 3400 ) * 16 = 8000 F

*actual worked hours is less than standard set, so Favorable

.

5. Sales price variance

It is the difference between actual selling price and standard selling price for actual units sold

Sales price variance = ( Actual price * actual units ) - ( standard price - actual units sold )

Where,

Actual price * actual units = 272000

Standard price = 85

Actual units = 3400

Sales price variance = 272000 - (85 * 3400 ) = 272000 - 289000 = 17000 U

*It is a revenue variance. Actual sales price less than standard price, so Unfavorable

.

6. Sales margin volume variance

It is the difference in the sales volume of sold units

Sales margin volume variance = ( Actual volume - Standard volume ) * Standard selling price

Sales margin volume variance = ( 3400 - 3000 ) * 85 = 400 * 85 = 34000 F

*Actual sold units are higher than standard. So favorable.

.

B. Write a short report to management explaining potential reasons for the variances calculated in part (a).

>>Reason for Material Price Variance

Following are the possible causes of this variance:

*Change in market price, May increased the cost per units

*Change in delivery cost, that’s increased the delivery cost

*Emergency purchases which may be due to upsets in production program, slackness of store keepers, non-availability or funs etc.

.

>> Reason for Material Usage Variance

Following are the possible causes of this variance:

*Efficient use of material in production

*Less wastage, and efficient workers

.

>>Reason for Labor Rate Variance

Following are the possible causes of this variance:

*Change in basic wage rate, here the rate per hour increased

*Paying higher wages in seasonal and emergency operations, may cause unfavorable variance.

*Paying overtime for urgent work, it increased rate per hour.

.

>>Reason for Labor Usage Variance

Following are the possible causes of this variance:

*efficient workers

*Skilled workers, they can reduce the hours used in the production

.

>> Reason for Sales price Variance

Following are the possible causes of this variance:

*increased competition, worst sales price realization, general deflation, sudden decrease in demand for the product

.

>> Reason for Sales Volume Variance

Following are the possible causes of this variance:

**higher total number of units sold than budgeted

.

C. Describe some of the actions management can take to ensure budgetary control is effective.

.

Budgetary Control is a type of control in which the actually incurred results are compared with the budgeted or standard results, so that appropriate action may be taken about any deviations between the two.

*Budgetary control is a system of controlling the cost which includes setup of Budgets coordinating the departments and developing responsibilities comparing performance with budgeted and acting upon results to gain the maximum profitable.

actions management can take to ensure budgetary control is effective.

a) preparation of budgets from actual time

b) communicating and agreeing budgets with all persons that concerns

c) having an good and proper accounting system that will record all actual costs incur

d) preparing statements that will compare actual costs with budgets, showing any variances and disclosing the reasons for them, for appropriate responsibility centers.

e) taking any appropriate action based on the analysis of the variances.