1. Dora Sdn. Bhd.

makes quality wooden benches for both internal market and

internationally. The budgeted output and sales unit for April 2018 was 4.000 benches
and the standard cost card per unit below was calculated on this basis:

Description Quantity Price per unit RM

Wood 25kgs RM3.4 per kg 85

Direct Labor 4 hours RM 9 per hour 36

Variable 4 hours RM 5 per hour 20

overhead

Fixed overhead 4 hours RM 17 per hour 68

Selling Price 220

Standard profit 28

Overhead are absorbed on the basis of labor hours. Actual result for April 2018 was as
follows:

Description Quantity Price per unit RM

Wood 80000kgs RM3.60 per kg 288000

Direct Labor 16000 hours RM 8 per hour 128000

Variable 60000
overhead

Total Production 3600 units 196000

cost

Sales 3600 units 810000

Actual Profit 162000

(i) Required to calculate the following variances, indicating whether each it’s favorable
(F) or unfavorable (UF)

(a) Direct material price.

(b) Direct material usage.

(c) Direct labor rate.

(d) Direct labor efficiency.

(e) Variable overhead expenditure.

(f) Variable overhead efficiency.

(ii) Briefly explain caused for all variance to occur.

(iii) Discuss Benefit and limitation in developing standard cost.
Answer:

a. Direct Material Price: (Standard Price – Actual Price) x Actual Quantity

= (RM3.40- RM 3.60) x 80000kgs

= RM16000 (Unfavorable)

b. Direct Material Usage: (Standard Quantity – Actual Quantity) x Standard Price

= (25kgsx3600)-90000kgs x RM 3.40

= RM34000 (Favorable)

c. Direct Labor Rate: (Standard Rate – Actual Rate) x Actual Hours

= (RM 9- RM 8) x 16000hours

= RM 16000 (Favorable)

d. Direct Labor Efficiency: (Standard hours of Actual Production- Actual Hours) x

Standard Rate

= (4hoursx RM3600) – 16000hours x RM9

= RM14400 (Unfavorable)

e. Variable Overhead Expenditure: (Actual Hours x Variable Overhead Actual Rate) -

Actual Variable Overhead)

 = (16000 hours x RM4) - RM65000

= RM1000 (Favorable)

f. Variable overhead Efficiency: (Standard hours of Actual Production – Actual Hours) x

Variable Overhead Actual Rate

= (4hours x 3600units) - 16000 x 4

= RM6400 (Unfavorable)

(ii) Explain caused for all variance to occur.

Causes for unfavorable direct labor price variance:

 A higher skilled worker with a higher labor pay rate is assigned to a job that
requires a worker with a lower skill rate.
 Overtime production requirement.
 Inefficient mix of employees than that anticipated when the standards were set.

The favorable direct material efficiency variance may be due to following reasons:

 Fewer materials than the standard quantity was used in the production process.
 More efficient worker and supervisor practices.
 Higher quality of materials purchased.
 The purchase of more efficient machinery during period.

(iii) Benefit and limitation in developing standard cost.

(a) Benefit
More useful information for managerial planning and decision making 
When management develops appropriate cost standards and succeeds in controlling
production costs, future actual costs should be close to the standard. As a result,
management can use standard costs in preparing more accurate budgets and in
estimating costs for bidding on jobs. A standard cost system can be valuable for top
management in planning and decision making.
More reasonable and easier inventory measurements 
A standard cost system provides easier inventory valuation than an actual cost system.
Under an actual cost system, unit costs for batches of identical products may differ
widely. For example, this variation can occur because of a machine malfunction during
the production of a given batch that increases the labor and overhead charged to that
batch. Under a standard cost system, the company would not include such unusual
costs in inventory. Rather, it would charge these excess costs to variance accounts after
comparing actual costs to standard costs.

(b)Limitation

Controversial materiality limits for variances 

Determining the materiality limits of the variances may be controversial. The
management of each business has the responsibility for determining what constitutes a
material or unusual variance. Because materiality involves individual judgment, many
problems or conflicts may arise in setting materiality limits.
No reporting of certain variances 
Workers do not always report all exceptions or variances. If management only
investigates unusual variances, workers may not report negative exceptions to the
budget or may try to minimize these exceptions to conceal inefficiency. Workers who
succeed in hiding variances diminish the effectiveness of budgeting.