17.16 Basic. A company uses standard absorption costing.

The following
information was recorded by the company for October:

(a) The sales price variance for October was:

(i) £38 500 Fav.

(ii) £41 000 Fav.

(iii) £41 000 Adverse

(iv) £65 600 Adverse

(b) The sales volume profit variance for October was:

(i) £6 000 Adverse

(ii) £6 000 Fav.

(iii) £8 000 Adverse

(iv) £8 000 Fav.

(c) The fixed overhead volume variance for October was:

(i) £2 000 Adverse

(ii) £2 200 Adverse

(iii) £2 200 Fav.

(iv) £4 200 Adverse

CIMA P1 Management Accounting: Performance Evaluation

17.18 Intermediate: Calculation of actual quantities working backwards from
variances. The following profit reconciliation statement summarizes the
performance of one of SEWs products for March.

Additional information:
• stocks of raw materials and finished goods are valued at standard cost;
• during the month the actual number of units produced was 1550;
• the actual sales revenue was £12 000;
• the direct materials purchased were 1000 kg.
Required:
(a) Calculate
(i) the actual sales volume;
(ii) the actual quantity of materials used;
(iii) the actual direct material cost;
(iv) the actual direct labour hours;
(v) the actual direct labour cost;
(vi) the actual variable overhead cost;
(vii) the actual fixed overhead cost. (19 marks)
(b) Explain the possible causes of the direct materials usage variance, direct
labour rate variance and sales volume variance. (6 marks)
CIMA Operational Cost Accounting Stage 2
Answer:

17.16
(a) Sales price variance = (actual margin – budgeted margin) x actual sales volume
(£17 – £12) x 8 200 = £41 000 Favourable
(Answer = (ii))
Note that fixed overhead rate per unit is £4 (£34 800/8 700)

(b) Sales volume = (actual sales volume – budgeted sales volume) x Standard
margin
(8 200 – 8 700) x £12 = 6 000 Adverse
(Answer = (i))

(c) Fixed overhead volume = (actual production – budgeted production) x standard

fixed overhead rate
(8 200 – 8 700) x £4 = £2000 Adverse
(Answer ¼ (i))

17.18
(a) (i) A fixed overhead volume variance only occurs with an absorption costing system.
The question indicates that a volume variance has been reported. Therefore the
company must operate an absorption costing system and report the sales volume
variance in terms of profit margins, rather than contribution margins.

Budgeted profit margin = budgeted profit (£4 250)/budgeted volume (1 500 units) = £2.83

Adverse sales volume variance in units = £850/£2.83 = 300 units

Therefore actual sales volume was 300 units below budgeted sales volume
Actual sales volume = 1 200 units (1 500 units – 300 units)

(ii) Standard quantity of material used per units of output: budgeted usage (750 kg)/
budgeted production (1 500 units) = 0.5 kg

Standard price = budgeted material cost (£4 500)/budgeted usage (750 kg) = £6
Material usage variance = (standard quantity – actual quantity) standard price
£150A = (1550 x 0.5 kg = 775 kg - AQ)
£6 - £150 = 4 650 - 6AQ
6AQ = 4 800
Actual quantity used = 800 kg

(iii) Material price variance = (standard price – actual price) x actual purchases
£1 000F = (£6 - actual price) x 1 000 kg
£1 000F = £6 000 - 1 000AP
1 000AP = £5 000
AP = £5 per kg
Actual material cost = 1 000 kg x £5 = £5 000

(iv) Standard wage rate = budgeted labour cost (£4 500)/budgeted hours (1 125) = £4
Labour efficiency variance = (standard hours – actual hours) x standard rate
£150A =(1 550 x 0.75 = 1 162.5 – actual hours) x £4 – £150 = £4 650 – 4AH
4AH = £4 800
Actual hours = 1 200
Answer:

17.18
(v) Total labour variance = standard cost – actual cost
(£200A + £150A) = (1 550 x 0.75 hrs x £4) – Actual cost
£350A = £4 650 - actual cost
Actual cost = £5 000

(vi) Total variable overhead variance = standard cost – actual cost

(£600A + £75A) = (1 550 x £1.50 = £2 325) - actual cost £675a = £2 325 - actual cost

Actual cost = £3 000

(vii) Fixed overhead expenditure variance = budgeted cost - actual cost

£2 500F = £4 500 - actual cost
Actual cost = £2 000