PM January 2021 LECTURE 4 WORKED EXAMPLES QUESTIONS (DRURY

(2012), p. 451, 17.17)

Q1.
KHL manufactures a single product and operates a budgetary control system that reports
performance using variances on a monthly basis. The company has an agreement with a
local supplier and calls off raw materials as and when required. Consequently there is no
inventory of raw materials.

The following details have been extracted from the budget working papers for 2011:

Annual Activity (units)

50,000 70,000 90,000
RM ‘000 RM ‘000 RM ‘000
Sales revenue 3,200 4,480 5,760
Direct materials (3 kgs per unit) 600 840 1,080
Direct labour (2 hours per unit) 1,000 1,400 1,800
Variable overhead (2 hours per unit) 400 560 720
Fixed overhead (2 hours per unit)* 600 600 600
*The fixed overhead absorption rate of RM 5 per hour was based on an annual budget of
60,000 units of the product being produced at a constant monthly rate throughout the
year, with the fixed overhead cost being incurred in equal monthly amounts.

The following actual performance relates to February 2011:

RM RM
Sales revenue (5,700 units) 330,600
Direct materials (18,600 kgs) 70,680
Direct labour (11,500 hours) 128,800
Variable overhead (11,500 hours) 47,150
Fixed overhead absorbed 60,000
306,630
Finished goods inventory adjustment 15,000 291,630
Gross profit 38,970
Fixed overhead over-absorption 3,000
Profit 41,970

For February 2011 budgeted sales were 6,000 units, the selling price variance was RM
34,200 Adverse and the sales volume profit variance was RM 4,200 Adverse. The actual
fixed overhead incurred was RM 57,000. Budgeted profit for February 2011 was RM
84,000.

Required:
Prepare a statement for February 2011 that reconciles the budgeted profit of RM 84,000
with the actual profit of RM 41,970. You should show the variances in as much detail as
possible given the data provided.
Q2
You are assistant accountant of this company. The following reconciliation statement for
the month ended 30 November 2014 was prepared by you.

RM
Budgeted net profit 200,000
Sales margin price variance 38,900 (A)
Sales margin volume variance 31,500 (F) 7,400 (A)

Direct material price variance 50,400 (F)

Direct material usage variance 78,000 (A) 27,600 (A)

Direct labour rate variance 8,000 (A)

Direct labour efficiency variance 3,100 (A) 11,100 (A)

Variable overhead expenditure variance 21,000 (A)

Variable overhead efficiency variance
(absorbed based on direct labour hours) 6,200 (A) 27,200 (A)

Fixed overhead expenditure variance 25,000 (F)

Fixed overhead volume capacity variance 8,000 (F)
Fixed overhead volume efficiency variance
(absorbed based on direct labour hours) 10,850 (A) 22,150 (F)
Actual net profit 148,850

Required:
Write a report to Mr. Stewart Khoo, the accountant, based on the above reconciliation
statement. Your report should contain the following:
 A suitable format;
 Brief description of the company’s performance for the month ended 30
November 2014;
 Detail discussion of each variance, which include possible reasons to the
occurrence of the variances.
PM UBAM2023 January 2019 Lecture 4 Worked Examples ANSWERS

Q1

Material price variance = (SP – AP) x AQ

= (4 – 3.80) x 18,600
= 0.20 x 18,600 = RM3,720 (F)

Material usage variance = (SQ – AQ) x SP SQ = 6,000 x 3 = 18,000 kg

= (18,000 – 18,600) x 4
= RM 2,400 (A)
Note:
Budgeted fixed overhead absorption rate: 10 (2 hrs x RM5 per hour)
Since the actual fixed overheads absorbed were RM60,000, actual production was 6,000
units (60,000/10)

Labour rate variance = (SR – AR) x AH

= (SR x AH) – AR x AH
= (10 x 11,500) – 128,800
= 115,000 – 128, 800
= 13,800 (A)

Labour efficiency variance = (SH – AH) x SR SH = 6,000 x 2 = 12,000 hrs

= (12,000 – 11,500) x 10
= 500 x 10
= RM 5,000 (F)

Variable O/H rate variance = (SR – AR) x AH

= (SR x AH) – AR x AH
= (4 x 11,500) – 47,150
= 46,000 – 47,150
= RM 1,150 (A)

Variable O/H efficiency var. = (SH – AH) x SR

= (12,000 – 11,500) x 4
= RM2,000 (F)

Fixed overhead variances:

Fixed overhead expenditure variance = (5,000 x 10) – (60,000 -3,000)
= 50,000 - 57,000
= 7,000 Adverse

Fixed overhead efficiency variance = (6,000 – 5,000) x 10

= 10,000 Favorable
 Reconciliation Statement/Operating Statement

Budgeted Profit (given) 84,000

Sales volume profit variance (given) 4,200 A
Sales price profit variance (given) 34,200 A
45,600
Direct Material Price variance 3,720 F
Direct Material usage variance 2,400 A
Direct Labor Rate variance 13,800 A
Direct Labor Efficiency variance 5,000 F
Variable overhead rate variance 1,150 A
Variable overhead efficiency variance 2,000 F
Fixed overhead expenditure variance 7,000 A
Fixed overhead volume variance 10,000 F
Actual Profit 41,970 (given)
Q2

Date: xx December 2014

Mr.StewartKhoo,
To: Accountant
Assistant
From: Accountant
Subject: Variance report for the month of November 2014

Generally, the company's performance for the month ended 30 November

2014 isbelow expectation, as it is RM 51, 150 away from the budgeted net
profit.

The deviation of profit is due to the following variances:

Sales margin price variance has an adverse variance of RM 38,900.
Obviously, the company's actual selling price is lower than the standard
selling price. This could be due to a promotional activity performed by the
company to boast sales.

As a result of the lower selling price sold, the company's sales volume has increased.
This is evidenced by the favorable sales margin volume variance of 31,500. Since
customers would usually purchase more when selling price is lower, this has brought
favorable effect to the company's sales volume.

The direct material price variance is favourable at RM 50,400. The company seemed to
have to purchase direct material at a lower price than expected. This could be due to
unexpected discount from new supplier, or additional discount for bulk purchases.

However, the cheaper direct material purchased had an adverse effect to the net profit
(i.e. lower net profit). The material purchased could be of inferior quality, hence
resulted additional wastages during production, as a huge adverse variance of RM
78,000 as direct material usage variance is recorded.

Direct labour rate variance recorded an adverse variance of RM 8,000. This could be
due to higher wages paid to the workers due to overtime or higher grade workers being
employed to perform the work of lower grade workers.

The direct labour efficiency variance recorded a small adverse variance of RM3,100.
The inefficiency recorded could be resulted by the inferior direct material purchased.
Since the quality of material received by production department is poorer, the workers
could have spent more time to salvage the situation.

Variable overhead expenditure variance has recorded a large adverse variance of

RM21,000. Further investigation is required to have further conclusion since many
items are grouped under the variable overhead.
Since variable overhead is absorbed based on direct labour hours, the reason for this
variance is the same as direct labour efficiency variance. The variance could also be
resulted due to budget being prepared using out-dated information.

The fixed overhead expenditure variance has recorded a large favourable variance of
RM25,000. Similar to variable overhead variance, many items are grouped under the
fixed overhead category. Thus, further investigation should be carried out to reach a
conclusion.

The fixed overhead capacity variance recorded a favourable variance of RM 8,000.

This shows the company's production team has produced more units than the usual
capacity.

However, the fixed overhead efficiency variance recorded an adverse

variance of RM 10,850. Though units of production are higher than the
factory's capacity, the workers had spent more time than usual for the actual
production units. Thus, efficiency is adverse.