Question

You have been appointed as financial manager for MBA. The company manufactures one product and uses standard costing system.

Standard cost per unit

Material 5kg at R12 50 per unit

Labour 2 hours at R35 per hour

Factory overheads R45 per labour hour.

Actual data for the month:

Number of units manufactured 12500

Material used R811 250                                                        

Issue price of material R13 75 per kg

Calculate and explain the difference between the total actual and the total standard cost.

Suggest a course of action

Answer 1

• Standard cost

Standard DATA for		12500	units
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct Material	62500	R             12.50	R       7,81,250.00
Direct labor	25000	R              35.00	R       8,75,000.00
Variable Overhead	25000	R              45.00	R     11,25,000.00
Total Standard Cost			R2,781,250
Total Units			12,500
Total Standard cost per unit			R 222.5

• Actual data given:

Actual DATA for		12500	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	59000kgs [811250/13.75]	R    13.750	R       8,11,250.00

• Difference and variance between material cost (between actual and standard)

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     12.50	-	$                    13.75	)	x	59000
	-73750
	Variance		73750			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	62500	-	59000	)	x	$                        12.50
	43750
	Variance		43750			Favourable-F
Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         7,81,250.00	-	$        8,11,250.00	)
	-30000
	Variance		30000			Unfavourable-U

• Total difference between material cost is $ 30000 [811250 – 781250]

Since Actual material cost is more than standard material cost, the difference (or variance) is Unfavourable.

This R30000 Unfavourable variance is due to difference in actual price and standard price (Material Price variance calculated above) and difference between actual kgs of material used and standard kgs to be used (material quantity variance calculated above)