Question

Question 1 [20 marks]
You oversee the production facility of CC Compounders Ltd. CC Compounders Ltd manufactures compound which is being used in various extrusion processes. You are preparing for a management meeting. One of the points on the agenda is the explanation of the variance between actual production cost and standard production cost and to decide on action plans to address the reasons for the variance.
The following is the standard cost per 1 ton of compound:

	Per Unit	Price	Standard Cost per ton (R)
Material: AC1032 Powder	175kg	R 3.75/kg	656.25
Labour
Mixing Department	1.5 Hours	R125/hour	187.50
Overheads: Overheads are allocated based on actual labour hours.		175.00/hour	262.50
Total standard cost per unit			1,106.25

Budgeted fixed costs amounts to R175,000 per month.
The cost clerk provided you with the following actual information for the month.

	Per Unit	Price	Total cost
Material: AC1032 Powder	185	R3.50/kg	809,375
Labour	2	R126.50/hour	316,250
Overheads			365,219
Fixed Costs			169,000

Production for the month was 1,250 units of compound.
Required:
1. Use standard cost variance analysis to analyse and explain the manufacturing variance.
(Show all your calculations as method marks are being awarded) (18)
2. Identify the two most important areas for management to focus on. Support your suggestion with reference to the relevant variance in point 1. (2)

Answer 1

• All working forms part of the answer
• Actual data and standard data for actual 1250 units for Variances calculation:

Actual DATA for		1250	units
	Quantity (AQ)	Rate (AR)	Actual Cost
	[A]	[B]	[A x B]
Direct Material	231250 kgs [1250 x 185]	$              3.50	$       8,09,375.00
Direct labor	2500 hours [1250 x 2]	$            126.50	$       3,16,250.00
Variable Overhead	2500	$            146.09 [365219/2500]	$       3,65,219.00
Standard DATA for		1250	Units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	218750 kgs [1250 x 175]	$                3.75	$       8,20,312.50
Direct labor	1875 [1250 x 1.5]	$            125.00	$       2,34,375.00
Variable Overhead	1875	$            175.00	$       3,28,125.00

• Requirement 1: Variance analysis

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        3.75	-	$                       3.50	)	x	231250
	57812.5
	Variance		57812.5			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	218750	-	231250	)	x	$                           3.75
	-46875
	Variance		46875			Unfavourable-U
Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         8,20,312.50	-	$        8,09,375.00	)
	10937.5
	Variance		10937.5			Favourable-F
Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                   125.00	-	$                  126.50	)	x	2500
	-3750
	Variance		3750			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1875	-	2500	)	x	$                      125.00
	-78125
	Variance		78125			Unfavourable-U
Labor Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         2,34,375.00	-	$        3,16,250.00	)
	-81875
	Variance		81875			Unfavourable-U
Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                   175.00	-	$                  146.09	)	x	2500
	72281
	Variance		72281			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1875	-	2500	)	x	$                      175.00
	-109375
	Variance		109375			Unfavourable-U
Variable Overhead Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         3,28,125.00	-	$        3,65,219.00	)
	-37094
	Variance		37094			Unfavourable-U

Budgeted Fixed Cost = $ 175,000
Actual Fixed Cost = $ 169,000
Fixed Overhead Variance = 175000 – 169000 = $ 6000 Favourable.

Total Standard cost = $ 1,382,812.5 (Variable) + $ 175,000 (fixed) = $ 1,557,812.5
Total Actual Cost = $ 1,659,844
Total Variance = 1659844 – 1557812.5 = $ 102,031.5 Unfavourable.

This $ 102,031.5 Unfavourable variances is explained and classified into Material, Labor, Variable overhead and Fixed Overhead variance as shown above.

• Requirement 2

Two areas where management need to focus to improve are:

---Usage of raw material: The standard consumption for one unit is 175 kg of raw material, however, 185 kgs in actual were consumed in production 1 unit. This has resulted in unfavourable material Quantity variance. Management should see that raw material is used efficiently and consumption is adhere to the standards set.

---Consumption of hours: The standard hour per unit are set as 1.5 hours, however in actual, iit took 2 hours to produce 1 unit. This has resulted in Unfavourable Labor efficiency variance as well as unfavourable variable overhead efficiency variance. The management should focus that labor force work efficiently in the production. May be the work force need training and development to improve their efficiency.