Chapter 12 Variance Analysis

Question 1 Flexible Budgets and Computation of Labour and Material

Variances
JB plc operates a standard marginal cost accounting system. Information relating to
product J, which is made in one of the company departments, is given below:
Standard marginal
product cost per unit
($)

Product J
Direct material (6 kgs at $4 per kg)
Direct labour (1 hour at $7 per hour)
Variable production overheada

24
7
3
34

Variable production overhead varies with units produced

Budgeted fixed production overhead, per month: $100,000.
Budgeted production for product J: 20,000 units per month.
a

Actual production and costs for month 6 were as follows:

Units of J produced (18,500 units)
Direct materials purchased and used: 113,500 kg
Direct labour: 17,800 hours
Variable production overhead incurred
Fixed production overhead incurred

$
442,650
129,940
58,800
104,000
735,390

Required:
(a)

(b)

prepare a columnar statement showing, by element of cost, the:

(i) original budget;
(ii) flexed budget;
(iii) actual;
(iv) total variance.
(9 marks)
subdivide the variances for direct material and direct labour shown in your
answers to (a) (i) (iv) above to be more informative for managerial purposes.
(4 marks)

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Question 2 Variance Analysis and Reconciliation of Actual and Budgeted Profit

BS Limited manufactures one standard product and operates a system of variance
accounting using a fixed budget. As assistant management accountant, you are
responsible for preparing the monthly operating statements. Data from the budget, the
standard product cost and actual data for the month ended 31 October are given
below.
Budgeted and standard cost data:
Budgeted sales and production for the month: 10,000 units
Standard cost for each unit of product:
Direct material:
X:
10 kg at $1 per kg
Y:
5 kg at $5 per kg
Direct wages:
5 hours at $3 per hour
Fixed production overhead is absorbed at 200% of direct wages.
Budgeted sales price has been calculated to give a profit of 20% of sales price.
Actual data for the month ended 31 October:
Production: 9,500 units sold at a price of 10% higher than that of budgeted.
Direct materials consumed:
X: 96,000 kg at $1.20 per kg
Y: 48,000 kg at $4.70 per kg
Direct wages incurred 46,000 hours at $3.20 per hour
Fixed production overhead incurred $290,000
Required:
Using the data given, you are required to prepare the operating statement for the
month ended 31 October to show the budgeted profit; the variances for direct
materials, direct wages, overhead and sales, each analyzed into causes, and actual
profit.
(30 marks)

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Question 3 Fixed Overhead Variance Calculation

A manufacturing company has provided you with the following data, which relate to
component RYX for the period which has just ended:

Number of labour hours

Production units
Overhead cost (all fixed)

Budget

Actual

8,400
1,200
$22,260

7,980
1,100
$25,536

Overheads are absorbed at a rate per standard labour hour.

Required:
Calculate the fixed production overhead cost variance and the following subsidiary
variances:
Expenditure
Efficiency
Capacity
(7 marks)

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Question 4

(ACCA Paper 2.4 Financial Management and Control June 2006 Q3)
Question 5
Simply Soup Limited manufactures and sells soups in a JIT environment. Soup is
made in a manufacturing process by mixing liquidised vegetables, melted butter and
stock (stock in this context is a liquid used in making soups). They operate a standard
costing and variances system to control its manufacturing processes. At the beginning
of the current financial year they employed a new production manager to oversee the
manufacturing process and to work alongside the purchasing manager. The production
manager will be rewarded by a salary and a bonus based on the directly attributable
variances involved in the manufacturing process.
After three months of work there is doubt about the performance of the new
production manager. On the one hand, the cost variances look on the whole
favourable, but the sales director has indicated that sales are significantly down and
the overall profitability is decreasing.
The table below shows the variance analysis results for the first three months of the
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managers work.

The actual level of activity was broadly the same in each month and the standard
monthly material total cost was approximately $145,000.
The standard cost card is as follows for the period under review

Required:
(a)

(b)

Using the information in table 1:

(i) Explain the meaning of each type of variances above (price, mix and yield
but excluding the total variance) and briefly discuss to what extent each
type of variance is controllable by the production manager.
(6 marks)
(ii) Evaluate the performance of the production manager considering both the
cost variance results above and the sales directors comments. (6 marks)
(iii) Outline two suggestions how the performance management system might
be changed to better reflect the performance of the production manager.
(4 marks)
The board has asked that the variances be calculated for Month 4. In Month 4
the production department data is as follows:

Required:
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Calculate the material price, mix and yield variances for Month 4. You are not
required to comment on the performance that the calculations imply. Round
variances to the nearest $.
(9 marks)
(Total 25 marks)
(ACCA F5 Performance Management Pilot Paper Q2)
Question 6
Crumbly Cakes make cakes, which are sold directly to the public. The new production
manager (a celebrity chef) has argued that the business should use only organic
ingredients in its cake production. Organic ingredients are more expensive but should
produce a product with an improved flavour and give health benefits for the
customers. It was hoped that this would stimulate demand and enable an immediate
price increase for the cakes.
Crumbly Cakes operates a responsibility based standard costing system which
allocates variances to specific individuals. The individual managers are paid a bonus
only when net favourable variances are allocated to them.
The new organic cake production approach was adopted at the start of March 2009,
following a decision by the new production manager. No change was made at that
time to the standard costs card. The variance reports for February and March are
shown below (Fav = Favourable and Adv = Adverse)

The production manager is upset that he seems to have lost all hope of a bonus under
the new system. The sales manager thinks the new organic cakes are excellent and is
very pleased with the progress made.
Crumbly Cakes operate a JIT stock system and holds virtually no inventory.
Required:
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(a)

Assess the performance of the production manager and the sales manager and
indicate whether the current bonus scheme is fair to those concerned. (7 marks)

In April 2009 the following data applied:

Standard cost card for one cake (not adjusted for the organic ingredient change)

The budget for production and sales in April was 50,000 cakes. Actual production and
sales was 60,000 cakes in the month, during which the following occurred:

All cakes produced must weigh 036 kg as this is what is advertised.

Required:
(b)

Calculate the material price, mix and yield variances and the sales price and
sales contribution volume variances for April. You are not required to make any
comment on the performance of the managers.
(13 marks)
(Total 20 marks)
(ACCA F5 Performance Management June 2009 Q3)
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Question 7
Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled
labour using mainly traditional manual techniques. The manufacturing department is a
cost centre within the business and operates a standard costing system based on
marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of
the bats by sourcing wood from a new supplier and de-skilling the process a little by
using lower grade staff on parts of the production process. The standards were not
adjusted to reflect these changes.
The variance report for April 2010 is shown below (extract).

The production director pointed out in his April 2010 board report that the new grade
of labour required significant training in April and this meant that productive time was
lower than usual. He accepted that the workers were a little slow at the moment but
expected that an improvement would be seen in May 2010. He also mentioned that
the new wood being used was proving difficult to cut cleanly resulting in increased
waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up
20% on the previous month. The sales director resigned after the board meeting
stating that SW had always produced quality products but the new strategy was bound
to upset customers and damage the brand of the business.
Required:
(a)

Assess the performance of the production director using all the information
above taking into account both the decision to use a new supplier and the
decision to de-skill the process.
(7 marks)

In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as
follows:
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In May 2010 the following results were achieved:

40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket
bats. No inventory of raw materials is held. The labour was paid for 62,000 hours and
the total cost was $694,000. Labour worked for 61,500 hours.
The sales price was reduced to protect the sales levels. However, only 18,000 cricket
bats were sold at an average price of $65.
Required:
(b)

Calculate the materials, labour and sales variances for May 2010 in as much
detail as the information allows. You are not required to comment on the
performance of the business.
(13 marks)
(Total 20 marks)
(ACCA F5 Performance Management June 2010 Q2)

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Question 8
Carat plc, a premium food manufacturer, is reviewing operations for a three-month
period of 2003. The company operates a standard marginal costing system and
manufactures one product, ZP, for which the following standard revenue and cost data
per unit of product is available:
Selling price
Direct material A
Direct material B
Direct labour

$12.00
2.5 kg at $1.70 per kg
1.5 kg at $1.20 per kg
0.45 hours at $6.00 per hour

Fixed production overheads for the three-month period were expected to be $62,500.
Actual data for the three-month period was as follows:
Sales and production
Direct material A
Direct material B
Direct labour
Fixed production overheads

48,000 units of ZP were produced and sold for

$580,800
121,951 kg were used at a cost of $200,000
67,200 kg were used at a cost of $84,000
Employees worked for 18,900 hours, but 19,200
hours were paid at a cost of $117,120
$64,000

Budgeted sales for the three-month period were 50,000 units of Product ZP.
Required:
(a)

(b)
(c)

(d)

Calculate the following variances:

(i) sales volume contribution and sales price variances;
(ii) price, mix and yield variances for each material;
(iii) labour rate, labour efficiency and idle time variances.
(8 marks)
Prepare an operating statement that reconciles budgeted gross profit to actual
gross profit with each variance clearly shown.
(5 marks)
Suggest possible explanations for the following variances:
(i) material price, mix and yield variances for material A;
(ii) labour rate, labour efficiency and idle time variances.
(5 marks)
Critically discuss the types of standard used in standard costing and their effect
on employee motivation.
(7 marks)
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(Total 25 marks)
(ACCA 2.4 Financial Management and Control December 2003 Q5)

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