Question

QUESTION 4 20 MARKS Namtech Ltd, is an electronics company which makes two types of televisions – plasma screen TV and LCD TV. It operates within a highly competitive market and is constantly under pressure to reduce prices. Namtech Ltd operates a standard costing system and performs a detailed analysis of both products on a monthly basis. Extracts from the management information for the month of November are as follows; Notes Total number of units made and sold 1400 1 Material Price Variance N$ 28 000 (Unfavourable) 2 Total Labour Variance N$ 6 050 (Unfavourable) 3 Notes; 1. The budgeted total sales volume for the TVs was 1180 units, consisting of an equal mix of plasma screen TVs and LCD screen TVs. The actual sale volume was 750 plasma TVs and 650 LCD TVs. Standard sales prices are N$ 350.00 per unit for the plasma TVs and N$ 300.00 for the LCD TVs. The actual sales prices achieved during November were N$ 330.00 per unit of plasma TVs and N$ 290 per unit for the LCD TVs. The standard contribution for plasma TVs and LCD TVs are N$ 190.00 and N$ 180.00 respectively. 2. The reason for this variance was an increase in the purchase price of its key components, Gammer. Each plasma TV and each LCD TV made requires one unit of component Gammer for which Namtech Ltd standard cost is N$ 60.00 per unit. Due to a shortage of components in the market, the market price for November went up to N$ 85.00 per unit of Gammer. Namtech actually paid N$80.00 per unit for it. 3. Each Plasma TV uses two standard hours of labour and each LCD TV uses one and a half standard hour of labour. The standard cost for the labour is N$ 14.00 per hour and this also reflects the actual cost per labour for the company permanent staff in November. However because of the increase in the sales and production volumes in November, the company also had to use additional temporary labour at a higher cost of N$ 18.00 per hour. The total capacity of Namtech Ltd permanent workforce is 2 200 hours production per month, assuming full efficiency. In the month of November, the permanent workforce were wholly efficient, taking exactly two hours to complete each plasma TV and exactly one and a half hour to produce each LCD TV. The total labour variance therefore relates solely to the temporary workers, who took twice as long as the permanent workers to complete their production. REQUIRED: 4.1 Calculate the Sales Price Variance (2) 4.2 Calculate the Sale Volume Contribution Variance (2) 4.3 Calculate the Material Price Planning Variance (2) 4.4 Calculate the Material Price Operational Variance (2) 4.5 Calculate the labour Rate Variance (3) 4.6 Calculate the Labour Efficiency Variance (3) 4.7 Explain any three reasons why the company will be interested in computing the variances in 3.3 and 3.4 (6)

Answer 1

Description	Amount ($)
Material price Variance	28000	Unfavourable
Total Labour Variance	6050	Unfavourable
Actual Units made and sold	1400
Budgeted Sales Volume	1180
Sales Mix	Actual Quantity	Budgeted Quantity	Standard price	Actual Price	Standard Contribution	Actual Sales	Budgeted Sales of actual Quantity
Plasma Screen TVs	750	590	350	330	190	247500	262500
LCD Screen TVS	650	590	300	290	180	188500	195000
						436000	457500
Material Cost	Requirement per unit	Standard cost per unit of Gammer	Revised Standard cost per unit of Gammer	Actual Cost per unit of Gammer
Plasma Screen TVs & LCD Screen TVS	1	$60	$85	$80
Labour Cost	Standard Labour Hours per unit	Standard Cost per hour	Actual Labour Hours per Unit	Actual Cost per hour
Permanent
Plasma Screen TVs	2	14	2	14
LCD Screen TVS	1.5	14	1.5	14
Total Capacity of permanent employees (hours)	2200
The permanent workforce was highly efficient but were limited to 2200 hours. Hence the extra hours which is 275 hours were by temporary workers.
But the temporary workers took twice as long as permanent workers which is 550 hours (275*2)
Therefore, actual hours = 2200+550 = 2750 hours
Actual Labour Cost = (2200*14) + (550*18) = $40,700
( $14 is the actual rate which is same as standard labour rate and $18 is paid to temporary workers)
Standard cost at actual hours = 2750 x $14 = $38,500
Actual cost = $40,700
4.1 Sales Price Variance	21500	Unfavourable	(Actual sales - Budgeted sales of Actual quantity)
(2) 4.2 Sales volume contribution Variance	41200	Favourable	(Actual sales volume - Budgeted sales volume) * Standard contribution
(2) 4.3 Material Price Planning Variance	35000	Unfavourable	(revised standard cost- standard cost ) * actual material consumed
(2) 4.4 Material Price Operational Variance	7000	Favourable	(material price variance - material price planning variance)
(2) 4.5 Labour rate variance	2200	Unfavourable	(Actual Cost of labour - Standard cost at actual hours)
(3) 4.6 Labour efficiency variance	3850	Unfavourable	(Total labour variance - labour rate variance)

Reasons Reasons why company is interested in material price planning variance –

1. This variance can be useful for the Company to get an understanding that how skillful the managers of the company are in estimating the future prices
2. The company gets updated of the changing market price of the material
3. Planning variance helps the Company to understand  the extent to which the original standard needs to be adjusted in order to reflect changes in operating conditions.

Reasons why company is interested in labour efficiency variance –

1. This variance can be useful for the Companyor spotlighting those areas in the production process that are using more labor hours than anticipated
2. If the outcome comes unfavourable, process will likely to be a review to see if the underlying process can be improved
3. it can helpful for providing incentives to labour who are more efficient than others.