Question

Question 1

Kearsley Ltd manufactures a single product, a laminated product used in kitchen surfaces. The standard cost is £118 and is made up as follows:

                                                                                                     £
Direct materials             8 sq. metres at £5 per square metre       40.00

Direct labour                 6 hours at £5 per hour                           30.00

Variable overheads       6 hours at £3 per hour                           18.00

Fixed overheads           6 hours at £5 per hour                           30.00

                                                                                                118.00

The standard selling price of the product is £150. The monthly budget projects production and sales of 650 units. The company operates an absorption costing system and recovers overhead through a direct labour basis.

Actual figures for the month of September 2020 are as follows:

Sales                            600 units at £155 per unit

Production                    700 units

Direct Labour                4,100 hours costing £18,655

Direct materials             6,000 square metres costing £28,500

Variable overheads       £12,000

Fixed Overheads           £23,575

You are required to calculate and suggest possible reasons for the following variances:

1. Materials price and usage
2. Labour rate and efficiency
3. Variable overhead efficiency and expenditure
4. Fixed overhead expenditure, volume efficiency and volume capacity

Question 2

It is claimed that the origins of standard costing are said to date back to the early twentieth century, possibly even the late nineteenth century. Standard costing have been descried as outdated and incompatible with modern manufacturing techniques. Discuss whether standard costing is still relevant in the modern wor

Answer 1

1.   Material Price Variance

= (Actual unitcost - Standard unit cost) * Actual Quantity Purchased.

= [(28500/6000) -  5 ] * 6000

= [ 4.75 - 5 ] *6000

= 1500 favourable

Material Usage Variance

= (standard quantity of material allowed for production – actual quantity used) * standard price per unit of material

= [ (8*700) - 6000] * 5

= [ 5600 - 6000 ] * 5

= 2000 Adverse

2. Labour Rate Variance

= (Actual rate - Standard rate) * Actual hours

= [ ( 18655 / 4100 ) - 5 ] * 4100

= [ 4.55 - 5 ] *4100

= 1845 Favourable

Labour Efficiency Variance

= [ Actual Hours - Standard hours ] * Standard Rate

= [ 4100 - (700*6) ] * 5

= [ 4100 - 4200 ] * 5

= 500 Favouable

3. Variable Overhead Efficiency Variance

=  (actual labor hours - budgeted labor hours) x hourly rate for standard variable overhead

or

= Standard cost for standard hours - standard cost for actual Hours

= ( 6 * 700 * 3 ) - ( 4100 * 3 )

= 12600 - 12300.

= 300 favourable

Variable Overhead expenditure Variance

= ( Standard variable overhead Rate − Actual Variable Overhead Rate ) * Actual Labor Hours

or

= Standard rate for actual Hours - Actual Cost for actual hours

= ( 4100 * 3 ) - 12000

= 12300 - 12000

= 300 Favourable

4. Fixed overhead expenditure Variance

=  Actual costs − Budgeted costs

= 23575 - ( 5 * 6 * 700 )

= 23575 - 21000

= 2575

Fixed Overhead Volume Efficiency Variance

= (actual hours – standard hours of actual output) * standard fixed overhead absorption rate

= [ 4100 - ( 6 * 700 ) ] * 5

= ( 4100 - 4200 ) * 5

= 500 Adverse

Fixed Overhead volume capacity

= (Budgeted hours – Actual hours) * Budgeted fixed overhead absorption rate per hour

= [ (6 * 700 ) - 4100 ] * 4.55

= ( 4200 - 4100 ) * 4.55

= 455 favourable

Answer to Question 2

Criticisms of Standards Costing

Even though accountants believed that standard costing is an instrumental factor aimed at meeting the needs of the business environment by creating a more defined and system of operations. The latter has not been the case with a majority questioning the applicability of the approach in modern businesses

1. Changing cost Structure

It is evident that most companies suffer from overhead costs that have become additional factory costs. As a result, direct labor cost has reduced in value leading to many of the firms becoming short-term and fixed. Since standard fixing is the system that views to be suitable in enhancing direct and variable costs, bringing fixed and indirect damages make its effectiveness questionable.

2. Inconsistency with Modern Management Approach

The changing nature of technologies make various organizations adopt new management practices that aim at enhancing zero defective production, but deliver high standard goods and services, and at the same time give room for improvement. It is evident that variance analysis has no correlations of supporting the contemporary managerial philosophies. The management is always set to look for new ways of obtaining suitable materials but at the lowest cost possible.

3. Over-Emphasis of Direct Labor

Even though direct labor is continuously diminishing, standard costing variance analysis focuses more on it. The latter only remains to be a small part of the factory costs but used in the overhead allocation base. Thus, in a bid to reduce the allocation, managers tend to reduce labor allocation

4. Delayed Feedback Reporting

Company’s performance primarily depends on a timely report that provides room for the implementation of various proposed changes. Different companies have different ways of preparing a performance report, with some carrying it out weekly or monthly. Hiding the fact that operations always take place in a factory daily, then, these lengthy timeframes prove unessential in improving day-to-day control operations