MN1018: MANAGEMENT ACCOUNTING

Seminar 6: Budgeting

Exercise 1:

Please choose the correct answers.

1. The sources of quantitative standards include

a. historical experience.
b. engineering studies.
c. input from operating personnel.
d. historical experience, engineering studies, and input from operating
personnel.
e. None of these.

Explain your answer.

2. Ideal standards
a. do not allow for machine breakdowns, slack, or lack of skill (even
momentarily).
b. demand maximum efficiency.
c. can be achieved only if everything operates perfectly.
d. All of these.
e. None of these.

Exercise 2:

James Company manufactures t-shirts. During the year, it manufactured 250,000 t-

shirts, using 2 hours of direct labor at a rate of $8.50 per hour. The materials and
labor standards for manufacturing the t-shirts are:

Direct materials (6 yards of fabric @ $3 per yard) $18

Direct labor (2.4 hours @ $8.00 per hour) $19.2

It took James 1,400,000 yards at $2.50 per yard to make the 250,000 t-shirts.

1. What is James’ materials price variance assuming that materials purchased

equals materials used?

a. $750,000 F
b. $700,000 F
c. $700,000 U
d. $750,00 U

2. What is James’ materials usage variance?

a. $250,000 F
b. $300,000 F
c. $300,000 U
d. $250,000 U

3. What is James’ labor rate variance?

a. $190,625 F
b. $250,000 F
c. $250,000 U
d. $193,750 U

4. What is James’ labor efficiency variance?

a. $800,000 U
b. $850,000 F
c. $800,000 F
d. $850,000 U

Exercise 3: (ACCA exam 2014)

Castilda Co manufactures toy robots. The company operates a standard marginal

costing system and values inventory at standard cost.
The following is an extract of a partly completed spreadsheet for calculating
variances in month 1.
Required:

(a) Which formula will correctly calculate the direct labour efficiency variance
in cell B18?
A = (C9*C4)- B13
B = B13-(C9*C4)
C = (C9*C4)- (150,000*8)
D = (150,000-(C9*6))*8 (2 marks)

(b) Calculate the following for month 1:

(i) Sales volume variance and state whether it is favourable or adverse;

(ii) Sales price variance and state whether it is favourable or adverse.

(c) Castilda’s management accountant thinks that the direct labour rate and
efficiency variances for Month 1 could be interrelated.
Required:
Briefly explain how the two direct labour variances could be interrelated.

Exercise 4: Discussion

I. Please explain how standard costing and variance analysis can be used to
analyse company’s performance.
II. What are points of criticism for the wide-spread use of budgets in the
business practice?