Question

Brenda and Eddie run The Italian Restaurant selling a variety of pasta dishes each using similar ingredients and taking the same amount of time to prepare.
To try to control costs they instigate a standard costing system, deriving the following standard cost per meal.
Ingredients (average value) 400g @$1.50/kg 0.6
Labor 30min @$4/hour 2
Variable overhead 30min @$1/hour 0.5
Fixed overhead 30min @$2.5/hour 1.25
Standard cost 4.35
Selling profit 2.60
Selling price 6.95

The overheads are absorbed on the assumption that Brenda and Eddie normally sell 100 pasta meals per day over the year during which they are open for 300 days.
During one six day week, the following results are obtained:
Meals sold 630 total revenue=$4500
Ingredients : bought 260kg for $380
:used 240kg
Hours paid: 300 hours costing $1350
Timelost due tolate delivery of ingredients=10 hours
Variable overhead $325
Fixed overhead $750
Required:
(a) Calculate all the variance and interpret the possible reasons for variance.
(b) Prepare an operating statement using absorption costing method and variable costing method. Reconcile the budgeted profit to the actual profit (for one week).
(c) Discuss the principles for variance analysis.

Answer 1

A.
Particulars	Standard Qty Input	Standard Input Price	Standard Cost	Actual Qty Input	Actual Price	Actual Cost per Unit	W.Note
Ingredients	400 Gm	1.5/ KG	0.60	260	380	1.46
Labour	30 Minutes	4/Hour	2.00	300	1350	4.50	Note:1
Variable OH	30 Minutes	1/Hr	0.50	630	325	0.52	Note:2
Fixed OH	30 Minutes	2.5/Hr	1.25	5000	750	0.15	Note:3
Total Cost			4.35			6.63
Profit (Sales price- Cost)			2.60			0.52
Selling Price			6.95	630	4500	7.14
Note 1: Time lost due tolate delivery of ingredients is recovered from cost of goods
Note 2: Over head is distributed based on total quantity produced
Note 3: Fixed cost is distributed based on standard qty i.e (100 meals*300 days)/6days=5000
B. Profit Statement	Absorption Costing	Variable Costing
Sales	4,500.00	4,500.00
Less:
Material Purchased	-380.00	-380.00
Labour charges	-1,305.00	-1,350.00
Variable OH	-325.00	-325.00
Add: Closing stock value	29.60	-
Contribution	2,519.60	2,445.00
Less: Fixed Cost	-750.00	-
Profit	1,769.60	2,445.00
C.
Variance is a result of difference between standard cost and Actual Cost.
Standard costs are compared to actual costs, and mathematical deviations between the two are termed variances.
Variances can be in material,labour,over heads etc. which may be classified into favorable and unfavorable variances