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# TOPIC => Practice Questions

Question: May

You have been asked to examine the performance of a subsidiary company for May 19X1. The
subsidiary supplies kitchen units to the building industry. The standard cost of one unit for May was
as follows.
£
Direct material 5 kilos at £4 per kilo 20
Direct labour 4 hours at £6 per hour 24
Overheads (based upon an overhead absorption rate of £4 per labour hour) 16
60

## The actual results were as follows.

(a) 1,300 units were made.
(b) Direct material used was 6,600 kilos at a total cost of £25,080.
(c) Direct labour was 5,330 hours at a cost of £32,513.
(d) Actual fixed overheads were £22,000.

Required:
Calculate the following.
(a) (i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Fixed overhead price variance
(vi) Fixed overhead usage variance
(vii) Fixed overhead capacity variance

(b) Prepare a variance report for management for May 19X1 reconciling the standard costs for
actual production with actual costs, clearly showing the total variance for each element of cost.
(Note. Sub-variances are not required.)

## Question: Brain Ltd

Brain Ltd produces and sells one product only, the Blob, the standard cost for one unit being as
follows.
£
Direct material A - 10 kilograms at £20 per kg 200
Direct material B -5 litres at £6 per litre 30
Direct wages-5 hours at £6 per hour 30
Fixed production overhead 50
Total standard cost 310

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units. Fixed production overhead is absorbed on the basis of direct labour hours. During April 19X3
the actual results were as follows.

## Production 800 units

Material A 7,800 kg used, costing £159,900
Material B 4,300 units used, costing £23,650
Direct wages 4,200 hours worked for £24,150
Fixed production overhead £47,000

Required:
(a) Calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances and then subdivide the
volume variance.

## Question: Armoured Kangaroo Ltd

Armoured Kangaroo Ltd manufactures one product, and the entire product is sold as soon as it is
produced. There are no opening or closing stocks and work in progress is negligible. The company
operates a standard costing system and analysis of variances is made every month. The standard cost
card for the product, a boomerang, is as follows.

Boomerang £
Direct materials 0.5 kilos at £4 per kilo 2.00
Direct wages 2 hours at £2.00 per hour 4.00
Variable overheads 2 hours at £0.30 per hour 0.60
Fixed overhead 2 hours at £3.70 per hour 7.40
Standard cost 14.00

Budgeted output for the month of June 19X7 was 5,100 units. Actual results for June 19X7 were as
follows.

## Production was 4,850 units.

Materials consumed in production amounted to 2,300 kilos at a total cost of £9,800.
Labour hours paid for amounted to 8,500 hours at a cost of £16,800.
Actual operating hours amounted to 8,000 hours.
Variable overheads amounted to £2,600.
Fixed overheads amounted to £42,300.

Required:
(a) Calculate all variances.
(b) Prepare a statement reconciling budgeted costs to actual costs for the month ended 30 June
19X7.

Question: WH Limited

WH Limited uses a standard costing system which produces monthly control statements to monitor
and control costs. One of their products is product M.

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To manufacture product M, a perishable, high quality raw material is carefully weighed by direct
employees. Some wastage and quality control rejects occur at this stage. The employees then
compress the material to change its shape and create product M.

All direct employees are paid a basic hourly rate appropriate to their individual skill level, and a
bonus scheme is in operation. Bonuses are paid according to the daily rate of output achieved by
each individual.

A standard allowance for all of the above operational factors is included in the standard cost of
product M. Standard cost data for one unit of product M is as follows.

Standard cost
£ per unit
Direct material X 4.5 kg x £4.90 per kg 22.05
Direct labour 10.3 hours x £3.50 per hour 36.05
Standard direct cost 58.10

During November, the following costs were incurred producing 400 units of product M.

Actual costs
£
Direct material X 2,100 kg 9,660
Direct labour 4,000 hours 16,000
Actual direct cost 25,660

Required:
(a) Calculate the following direct cost variances for product M for November.
(i) Direct material price
(ii) Direct material usage
(iii) Direct labour rate
(iv) Direct labour utilisation or efficiency

(b) Present the variances in a statement which reconciles the total standard direct cost of production
with the actual direct cost for product M in November.

(c) As assistant accountant for WH Limited, you are asked to write a memo to the production
manager which explains the following.

(i) The meaning of each of the direct cost variances calculated for product M.
(ii) Two possible causes of each of the variances which you have calculated for product M for
November.
(iii) Two examples of interdependence which may be present in the variances which you have
calculated for product M for November. Explain clearly why the variances may be
interdependent, so that the manager can better understand the meaning of the finance
directors statement.

(d) The production manager has now approached you for further explanations concerning the
standard costing control system. He is particularly interested in understanding how the standard price
is set per kg of material used.

## Write a second memo to the production manager, explaining the following.

(i) The information that would be needed to determine the standard price per kg of material X.
(ii) The possible sources from which this information might be obtained

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## Statement of fixed production overhead variances for June

£
Overhead price variance (450)
Overhead usage variance 65
Overhead capacity variance 208
Total overhead variance (177)

## Note: Variances in brackets are adverse.

Required:
Write a memo to your colleague, explaining for each overhead variance the significance of the
adverse or favourable result, and suggesting one possible reason for each of the overhead variances.

## Question: Backe and Smash Ltd

Backe and Smash Ltd manufactures a brand of tennis racket, the Winsome, and a brand of squash
racket, the Boastful. The budget for October was as follows.
Winsome Boastful
Production (units) 4,000 1,500
Direct materials:wood (£0.30 per metre) 7 metres 5 metres
gut (£1.50 per metre) 6 metres 4 metres
Other materials £0.20 £0.15
Direct labour (£3 per hour) 30 mins 20 mins

Variable: £
power 1,500
maintenance 7,500
9,000

Fixed: £
supervision 8,000
heating and lighting 1,200
rent 4,800
depreciation 7,000
21,000

## Production: Winsome 3700 units

Boastful 1,890 units

## Direct materials, bought and used: £

wood 37,100 metres 11,000
gut 29,200 metres 44,100
other materials 1,000
Direct labour 2,200 hours 6,850
Power 1,800
Maintenance 6,900
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Supervision 7,940
Heating and lighting 1,320
Rent 4,800
Depreciation 7,000

Required:
Calculate cost variances for the month of October. Assume that a standard absorption costing system
is in operation.

## Question: Hides of March Ltd

Hides of March Ltd manufacture a standard leather walking boot, model number M25, for which the
standard unit cost price are as follows.
£ £
Direct materials
Leather 3 units at £5 per unit 15
Other materials 3
18
Direct labour 1 ½ hours at £4 per hour 6
Variable production overheads 1 ½ hours at £2 per hour 3
Fixed production overheads 1 ½ hours at £6 per hour 9
Standard cost 36

## During period 7 of 19X8, actual results were as follows.

Production of M25 3,200 units

Costs
Leather purchased and used: quantity 9,200 units
cost £45,400
Other materials purchased and used £9,500
Direct labour: hours paid for 5,850 hours
production time 5,100 hours
labour cost £24,100
Variable production overheads £10,650
Fixed production overheads £31,500
Sales price = £48 per unit

Required:
Prepare a statement for period 7 reconciling standard cost of actual production and actual cost of
production and specifying all the relevant variances.

Question: Inflation

Say the CPI stood at 126 compared to 120 when the standards were agreed.

## Budgeted output: 10,000 units

Actual output: 9,000 units
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Actual kgs: 26,500
Actual kgs cost £662,500

Required:
(a) Compute the materials price variance
(b) What was the rate of inflation
(c) Adjust the materials price variance for inflation (i.e. assume that the standard cost of £23 makes
no allowance for inflation).
(d) Now, assume inflation had been allowed for in the standard of £23.
Current price: £21.90
Forecast inflation: 10%
Show that the standard price should be £23.
(e) Using assumptions in part (d), recalculate the non-inflation materials price variance.

## Question: Working Backwards

It takes employees 15 minutes to produce a chair. They are paid a standard hourly rate for work
completed during the day. When overtime is worked in the evening, they are paid at time and a half.
The standard cost control system is based on an average of these two rates at £4.20 an hour.

The company has already computed the total materials variance as an adverse £5,000. It takes 4
metres of wood to produce a chair, and the standards cost per metre is £1.50.

The standard cost card shows the following for fixed overhead.

## Budgeted chairs: 5,000 chairs

Budgeted labour hours 1,250 hours
Budgeted fixed overhead £30,000

## Actual chairs 4,500 chairs

Actual labour hours 1,300 hours
(1,000 hours –day * £3.2 and 300 hours –overtime * \$4.80)

## Actual fixed overhead £25,000

Actual metres wood 19,000 metres

Required:
Prepare a fully broken down statement reconciling the actual costs with the standard costs.

## Question: Variances and Averages

You work as the assistant to the management accountant for a major hotel chain, Stately Hotels plc.
The new manager of one of the largest hotels in the chain, The Regent Hotel, is experimenting with
the use of standard costing to plan and control the costs of preparing and cleaning the hotel
bedrooms.

Two of the costs involved in this activity are cleaning labour and the supply of presentation soap
packs.

Cleaning labour
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Part-time staff are employed to clean and prepare the bedrooms for customers. The employees are
paid for the number of hours that they work, which fluctuates on a daily basis depending on how
many rooms need to be prepared each day.

The employees are paid a standard hourly rate for weekday work and a higher hourly rate at the
weekend. The standard cost control system is based on an average of these two rates at £3.60 per
hour.

The standard time allowed for cleaning and preparing a bedroom is fifteen minutes.

## Presentation soap packs

A presentation soap pack is left in each room every night. The packs contain soap, bubble bath,
shower gel, hand lotion etc. Most customers use the packs or take them home with them, but many
do not. The standard usage of packs used for planning and control purposes is one pack per room
night.

The packs are purchased from a number of different suppliers and the standard price is £1.20 per
pack. Stocks of packs are valued in the accounts at standard price.

## Actual results for May

During May, 8,400 rooms were cleaned and prepared. The following data was recorded for cleaning
labour and soap packs.

## Cleaning labour paid for:

Weekday labour 1,850 hours @ £3 per hour
Weekend labour 700 hours @ £4.50 per hour
2,550

## Presentation soap packs purchased and used:

6,530 packs @ £1.20 each
920 packs @ £1.30 each
1,130 packs @ £1.40 each
8,580
Required:
(a) Using the data above, calculate the following cost variances for May.
(i) Soap pack price
(ii) Soap pack usage
(iii) Cleaning labour rate
(iv) Cleaning labour utilisation or efficiency

(i) Suggest one possible cause for each of the variances which you have calculated, and outline
any management action which may be necessary.

Question: Alpha

You are employed as part of the management accounting team in a large industrial company which
operates a four-weekly system of management reporting. Your division makes a single product, the
Alpha, and, because of the nature of the production process, there is no work in progress at any
time.

The group management accountant has completed the calculation of the material and labour standard
costing variances for the current period to 1 December but has not had the time to complete any
other variances. Details of the variances already calculated are reproduced in the working papers
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below, along with other standard costing data.

## Quantity Unit price Cost per unit

Material (litres) 40 £4.00 £160
Labour (hours) 10 £8.40 £84
Fixed overheads (hours) 10 £6.70 £67
Standard cost per unit £311

## Standard Standard cost

Budgeted production Units unit cost of production
for the four weeks 12,000 £311 £3,732,000

Working papers:
Actual production and expenditure for the four weeks ended 1 December
Units produced 11,200
Cost of 470,000 litres of materials consumed £1,974,000
Cost of 110,000 labour hours worked £935,000
Expenditure on fixed overheads £824,000

## Material and labour variances

Material price variance £94,000 (A)
Material usage variance £88,000 (A)
Labour rate variance £11,000 (A)
Labour efficiency variance £16,800 (F)

Required:
You have been requested to do the following.
(a) Calculate the following variances.
(i) The fixed overhead expenditure variance
(ii) The fixed overhead volume variance
(iii) The fixed overhead capacity variance
(iv) The fixed overhead efficiency variance

(b) Prepare a report for presentation to the production director reconciling the standard cost of
production for the period with the actual cost of production.

Question: Memo

## Prepare a memo showing:

(a) Similarities and differences between fixed overhead variances and other cost variances such as
materials and labour cost variances.

(b) Explain what is meant by each of the fixed overhead variances and show, by way of examples,
how these can be useful to the production director in the planning and control of the division.

## Question: Albion Limited

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Albion Ltd operates a standard absorption costing system. Standards are established at the beginning
of each year. Each week the management accounting section prepares a statement for the production
director reconciling the actual cost of production with its standard cost. Standard costing data for
week 8 of quarter 4 in the current year is given below.

## Quantity Unit Price Cost per unit

Material (kilograms) 3 £23.00 £69
Labour (hours) 2 £20.00 £40
Fixed overheads hours) 2 £60.00 £120
Standard unit cost £229

## Budgeted production Budgeted Standard Standard cost

for week 8 units cost per unit of production
10,000 £229 £2,.290,000

During week 8, production of Xtra totalled 9,000 units and the actual costs for that week were:
Inputs Units Total cost
Materials (kilograms) 26,500 £662,500
Labour (hours) 18,400 £349,600
Fixed overheads (hours) 18,400 £1,500,000

Required:
Calculate the following variances.
Direct materials total variance
Direct materials price variance
Direct materials usage variance
Direct labour total variance
Direct labour rate variance
Direct labour efficiency variance
Fixed overhead total variance
Fixed overhead price variance
Fixed overhead volume variance
Fixed overhead efficiency variance
Fixed overhead usage variance

Prepare a statement reconciling actual costs of production with standard costs of production.

## Question: Microfit Ltd.

Microfit Ltd. produces a standard desk unit, which it primarily sells to new office developments. The
standard costs for one desk unit are as follows:

## Direct materials –Wood Sheets: 10 @ £20 per sheet £200

Direct materials -MDF Laminated Surfaces: 5 @ £6 each 30

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Direct wages –Hours: 5 @ £6 per hour 30
Fixed production overhead 50

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units. Fixed production overhead is absorbed on the basis of direct labour hours.

## During April 1999, the actual results were as follows:

Desk units produced 800 units
Wood sheets 7800 sheets, costing £159,900
Wood surfaces 4300 surfaces, costing £23,650
Direct wages 4200 hours, costing £24,150
Fixed production overhead £47,000

Required:
(a) calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances, and then subdivide the
volume variance.
(d) Prepare a variance report for management, reconciling the standard cost for actual production
with actual costs.
(e) Using a graph, show the materials price and usage variances for wood sheets, and the labour
variances.

## Question: Standard Desk Unit

SDU Ltd. produces a standard desk unit, which it primarily sells to new office developments. The
standard costs for one desk unit are as follows:

## Direct materials –Wood Sheets: 12 @ £18 per sheet £216

Direct materials -MDF Laminated Surfaces: 4 @ £7 each 28
Direct wages –Hours: 4 @ £5 per hour 20
Fixed production overhead 40
304

The fixed overhead included in the standard cost is based on an expected monthly output of 1100
units. Fixed production overhead is absorbed on the basis of direct labour hours.

## During April 1999, the actual results were as follows:

Desk units produced 1000 units
Wood sheets 10600 sheets, costing £165,300
Wood surfaces 4100 surfaces, costing £22,100
Direct wages 4700 hours, costing £27,150
Fixed production overhead £49,000

Required:
(a) calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances, and then subdivide the
volume variance.
(d) Prepare a variance report for management, reconciling the standard cost for actual production
with actual costs.
(e) Using a graph, show the materials price and usage variances for wood sheets, and the labour
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variances.

## Question: Office Suppliers Ltd.

Office Suppliers Ltd. produces a standard desk unit, which it primarily sells to new office
developments. The standard costs for one desk unit are as follows:
£
Direct materials –Wood Sheets: 11 @ £17 per sheet 187
Direct materials -MDF Laminated Surfaces: 5 @ £8 each 40
Direct wages –Hours: 5 @ £4 per hour 20
Fixed production overhead 60
£ 307

The fixed overhead included in the standard cost is based on an expected monthly output of 1000
units. Fixed production overhead is absorbed on the basis of direct labour hours.

## During April 1999, the actual results were as follows:

Desk units produced 900 units
Wood sheets 10,100 sheets, costing £155,300
Wood surfaces 4900 surfaces, costing £21,600
Direct wages 4300 hours, costing £27,150
Fixed production overhead £48,000

Required:
(a) calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances, and then subdivide the
volume variance.
(d) Prepare a variance report for management, reconciling the standard cost for actual production
with actual costs.
(e) Using a graph, show the materials price and usage variances for wood sheets, and the labour
variances.

## Question: Esselte Ltd.

Esselte Ltd. produces a standard desk unit, which it primarily sells to new office developments. The
standard costs for one desk unit are as follows:
£
Direct materials –Wood Sheets: 10 @ £15 per sheet 150
Direct materials -MDF Laminated Surfaces: 6 @ £9 each 54
Direct wages –Hours: 5 @ £5 per hour 25
Fixed production overhead 50
279

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units. Fixed production overhead is absorbed on the basis of direct labour hours.

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During April 1999, the actual results were as follows:
Desk units produced 1000 units
Wood sheets 10100 sheets, costing £155,300
Wood surfaces 4900 surfaces, costing £32,600
Direct wages 4300 hours, costing £27,150
Fixed production overhead £48,000

Required:
(a) calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances, and then subdivide the
volume variance.
(d) Prepare a variance report for management, reconciling the standard cost for actual production
with actual costs.
(e) Using a graph, show the materials price and usage variances for wood sheets, and the labour
variances.

## Question: Star Ltd.

Star Ltd. produces and sells one product only, the FXII welding tool. The standard cost for one unit
being as follows:
£
Direct materials A - 10 kilograms at £20 per kg 200
Direct materials B — 5 litres at £6 per litre 30
Direct wages — 5 hours at £6 per hour 30
Fixed production overhead 50
Total standard cost 310

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units. Fixed production overhead is absorbed on the basis of direct labour hours.

## During April 1998, the actual results were as follows:

Production 800 units
Material A 7,800 kgs used, costing £159,900
Material B 4,300 litres used, costing £23,650
Direct wages 4,200 hours worked, costing £24,150
Fixed production overhead £47,000

Required:
(a) Calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances and then subdivide the
volume variance.
(d) Prepare a variance report for management, reconciling the standard cost for actual production
with actual costs.
(e) Using a graph, show the materials price and usage variances, for material A.

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