Budgets for control

Part 2

Jovana Jugović
1. Newgate Limited manufactures Product A and the standard cost is as follows:
$
Selling price 52.00
Direct materials 0.5 kg X $8/kilo 4.00
Direct labour 2 hours X S 10/hour 20.00
Variable 2 labour hours X
1.20
overheads 60c/hour
Fixed overheads 2 hours X $7.40/hour 14.80
Standard cost 40.00
Standard profit 12.00

• Other information is as follows:

1. Budgeted output for the month of February was 5,100 units.
2. Production of 4,850 units was sold for $232,800.
3. Materials consumed were 2,300 kg costing $19,600.
4. Labour hours were 8,000 hours costing $84,000.
5. Variable overheads cost $5,200.
6. Fixed overheads cost $84,600.
• Required
1. Calculate two variances for each cost except fixed overheads (just one variance), using the
contribution approach and prepare an operating statement for the month of February,
reconciling the actual and the budgeted profit figures.
2. Prepare a brief report for the General Manager of Newgate Limited commenting on the
performance of the company in February, suggesting possible causes for significant variances.
• Budgeted sales volume: 5,100
• Actual sales volume: 4,850

• Budgeted sales price: 52

• Actual sales price: 232,800/4,850 = 48

• Sales price variance = AQ × AP – AQ × SP

• Sales price variance = 4,850 x 48 – 4,850 x 52 = (19,400) A

• Standard contribution = 52 – 4 – 20 – 1.2 = 26.8

• Sales contribution volume variance = AQ × SC – SQ × SC

• Sales contribution volume variance = 4,850 x 26.8 – 5,100 x 26.8 = (6,700) A
• Budgeted material quantity: 0.5 kg x 5,100 = 2,550 kg
• Actual quantity: 2,300 kg

• Budgeted purchase price: 8 $/kg

• Actual purchase price: 19,600 $/2,300 = 8.52 $/kg

• Materials price variance: AQ × AP – AQ x SP

• Materials price variance: 2,300 x 8.52 – 2,300 x 8 = 1,200 A

• Materials efficiency variance: AQ × SP – SQ × SP

• Materials efficiency variance: 2,300 x 8 – (4,850 x 0.5) x 8 =(1,000) F

Standard
quantity of
material for
the actual
volume
• Budgeted labour hours: 2h x 5,100 = 10,200 h
• Actual labour hours: 8,000 h

• Budgeted labour rate per hour: 10 $/h

• Actual labour rate per hour: 84,000$ /8,000h = 10.5 $/h

• Labour rate variance: AQ × AP – AQ x SP

• Labour rate variance: 8,000 x 10.5 – 8,000 x 10 = 4,000 A

• Labour efficiency variance: AQ × SP – SQ × SP

• Labour efficiency variance: 8,000 x 10 – (4,850 x 2) x 10 = (17,000) F

Standard labour hours for the actual volume

• Budgeted hours: 2h x 5,100 = 10,200 h
• Actual hours: 8,000 h

• Budgeted variable overheads rate per hour: 0.6 $/h

• Actual variable overheads rate per hour: 5,200 $/8,000 h = 0.65 $/h

• Variable overheads price variance: AQ × AP – AQ x SP

• Variable overheads price variance: 8,000 x 0.65 – 8,000 x 0.6 = 400 A

• Variable overheads efficiency variance: AQ × SP – SQ × SP

• Variable overheads efficiency variance: 8,000 x 0.6 – (4,850 x 2) x 0.6 = (1,020) F

Standard hours
for the actual
volume
• Fixed overhead

• Spending variance = AC – SC
• Spending variance = 84,600 – ( 5,100 x 14.8) = 9,120 A
 Favourable Adverse
$ $ $

Budgeted profit 5,100 x 12 61,200

Sales price variance 19,400
Sales volume 6,700
variance
Cost variances
Materials Price 1,200
Efficiency 1,000
Labour Price 4,000
Efficiency 17,000
Var OH Spending 400
Efficiency 1,020
Fix OH Spending 9,120
19,020 40,820 (21,800)
Actual profit 39,400
• Cause of variances
• Sales price: discounted price to increase sales volume but didn't have that effect
• Sales volume: reduced demand
• Materials price: Materials purchased at higher price – better quality maybe
• Materials usage: but we used less material – because of better quality
• Labour price: Paid a higher price for labour: overtime? Higher grade staff?
• Labour usage: but they did the job much quicker
• VO price: Higher purchase prices?
• FO : rent, rise on price?
2. Company „MN“ makes furniture. The standard cost of making a table is as follows:

25$/50 $/h = 0.5 h

• The budget for February sales revenue was $2,079,000. In February, in fact, 8,100 units were sold
for $2,114,100. Labour was 3,564 hours costing $192,456. The sales price variance and the sales
contribution volume variance for the month were which of the following:

a) Sales price variance: 72,900 F, Sales contribution volume variance: 32,000 A

b) Sales price variance: 72,900 A, Sales contribution volume variance: 32,000 F
c) Sales price variance: 69,300 F, Sales contribution volume variance: 26,000 A
d) Sales price variance: 72,900 A, Sales contribution volume variance: 26,000 F
• Budgeted sales volume: 2,079,000 $ /270 $ = 7,700
• Actual sales volume: 8,100

• Budgeted sales price: 270 $

• Actual sales price: 2,114,100 $ /8,100 = 261 $

• Standard contribution per unit = 270 – 120 – 25 – 45 = 80 $

• Sales price variance = AQ × AP – AQ × SP

• Sales price variance = 8,100 x 261 – 8,100 x 270 = (72,900) A

• Sales contribution volume variance = AQ × SC – SQ × SC

• Sales contribution volume variance = 8,100 x 80 – 7,700 x 80 = 32,000 F
3. Using the same information shown in Question 2, the labour rate and efficiency
variances were which of the following:
a) Labour rate variance: 14,256 A, Labour efficiency variance: 24,300F
b) Labour rate variance: 286 F , Labour efficiency variance: 24,300F
c) Labour rate variance: 14,256 F, Labour efficiency variance: 24,300 A
d) Labour rate variance: 286 A, Labour efficiency variance: 24,300 A
• Budgeted labour hours: 7,700 units (budgeted volume) x 0.5 h= 3,750 h
• Actual labour hours: 3,564 h

• Budgeted labour rate per hour: 50 $

• Actual labour rate per hour: 192,456/3,564 = 54 $

• Labour rate variance: AQ × AP – AQ x SP

• Labour rate variance: 3,564 x 54 – 3,564 x 50 = 14,256 A

• Labour efficiency variance: AQ × SP – SQ × SP

• Labour efficiency variance: 3,564 x 50 – (8,100 x 0.5) x 50 = (24,300) F

Standard
labour hours
for the actual
volume
4. Company R makes crockery. The materials budget for February’s output of 1,500
teapots was 1,200 kg of material, $10,560. In fact, 1,600 pots were made and the
actual material used 1,370kg costing $11,097. The materials price and efficiency
variances were as follows:
A. Materials price variance: 959 A, Materials efficiency variance: 792 F
B. Materials price variance: 959 F, Materials efficiency variance: 1,496 F
C. Materials price variance: 959 F, Materials efficiency variance: 792 A
D. Materials price variance: 959 A, Materials efficiency variance: 792 A
• Budgeted material quantity: 1,200 kg (1,200kg /1,500 units =0.8 kg per unit)
• Actual quantity: 1,370 kg

• Budgeted purchase price: 10,560/1,200 = 8.8 $

• Actual purchase price: 11,097/1,370 = 8.1 $

• Materials price variance: AQ × AP – AQ x SP

• Materials price variance: 1,370 x 8.1 – 1,370 x 8.8 = (959) F

• Materials efficiency variance: AQ × SP – SQ × SP

• Materials efficiency variance: 1,370 x 8.8 – (1,600 x 0.8) x 8.8 = 792 A

Standard
quantity of
material for
the actual
volume
5. A company manufactures one product the Z4. The budgeted output of Z4 for the year
was 60,000 units. Each unit of Z4 takes 2 hours of labour at a cost per labour hour of
£8. The actual output of Z4 for the year was 66,000 units with a total labour cost of £
1,000,000. What is the total labour cost variance for the year?

A. 40,000 A
B. 40,000 F
C. 56,000 A
D. 56,000 F
• Total variance = AQ × AP - AQ x SP + AQ × SP – SQ × SP
• Total variance = AQ × AP - SQ for actual output × SP

• Budgeted labour hours per unit: 2 h

• Budgeted labour rate per hour: 8 $

• Actual labour cost : 1,000,000

• Total variance = AQ × AP - SQ for actual output × SP

• 1,000,000 – (66,000 x 2) x 8= 1,000,000 – 1,056,000 = (56,000) F
6. The labour total variance for the latest period was favourable. Which ONE of the
following is certain to have caused this variance?
A. Lower hourly rates than standard and higher than budgets labour hours
B. Lower hourly rates than standard and lower than standard hours for the actual
production
C. Lower hourly rates than standard and higher than standard labour hours for the
actual production
D. Lower hourly rates than standard and lower than budgeted labour hours

• Total variance = AQ × AP - AQ x SP + AQ × SP – SQ × SP
7. Furniture Ltd manufactures high quality executive desks. Budgeted production for April was as
follows:

• Actual figures were as follows:

The labour rate and labour efficiency variances are which of the following?
• Budgeted labour hours: 800 h (800 h/20 desks = 40 h/desk)
• Actual labour hours: 864 h

• Budgeted labour rate per hour: 20 £

• Actual labour rate per hour: 18,576 $/864 h = 21.5 £

• Labour rate variance: AQ × AP – AQ x SP

• Labour rate variance: 864 x 21.5 – 864 x 20 = 1,296 A

• Labour efficiency variance: AQ × SP – SQ × SP

• Labour efficiency variance: 864 x 20 – (24 desks x 40 h/desk) x 20 = (1,920) F

Standard
labour hours
for the actual
volume
8. Baskerville Cereals manufactures dog biscuits. The standard costs and revenues of each tonne
of their most popular product is as follows:

Budgeted production and sales for the month of January 2018 were 25,000 tonnes. Fixed
overheads are absorbed on the basis of budgeted units. In fact, 26,500 tonnes were produced
and sold for £4,160,500. Costs incurred were as follows:

Required:
(a) Produce a statement reconciling the actual profit with the budgeted profit. Calculate all the
appropriate variances using the contribution approach with just one fixed overhead variance.
(14 marks)
(b)Present a brief report summarising possible reasons for each variance including any possible
inter-connection between any of these variances.
(6 marks)
• Budgeted sales volume: 25,000
• Actual sales volume: 26,500

• Budgeted sales price: 160

• Actual sales price: 4,160,500/26,500 = 157

• Sales price variance = AQ × AP – AQ × SP

• Sales price variance = 26,500 x 157 – 26,500 x 160 = (79,500) A

• Budgeted contribution per tonne: 59

• Sales contribution volume variance = AQ × SC – SQ × SC

• Sales contribution volume variance = 26,500 x 59 – 25,000 x 59 =88,500 F
• Budgeted material quantity: 1,2 x 25,000 = 30,000 t
• Actual quantity: 30,475 t

• Budgeted purchase price: 30 £

• Actual purchase price: 956,915/30,475 = 31.4 £

• Materials variance: AQ × AP – AQ x SP
• Materials price variance: 30,475 x 31.4 – 30,475 x 30= 42,665 A

• Materials efficiency variance: AQ × SP – SQ × SP

• Materials efficiency variance: 30,475 x 30 – (26,500 x 1.2) x 30 = (39,750)F
Standard
quantity of
material for
the actual
volume
• Budgeted labour hours: 2h x 25,000 = 50,000 h
• Actual labour hours: 58,300

• Budgeted labour rate per hour: 22.5 £

• Actual labour rate per hour: 1,270,940/58,300 = 21.8 £

• Labour rate variance: AQ × AP – AQ x SP

• Labour rate variance: 58,300 x 21.8 – 58,300 x 22.5 = (40,810) F

• Labour efficiency variance: AQ × SP – SQ × SP

• Labour efficiency variance: 58,300 x 22.5 – (26,500 x 2) x 22.5 = 119,250 A

Standard
labour hours
for the actual
volume
• Budgeted hours: 2h x 25,000 = 50,000 h
• Actual hours: 58,300

• Budgeted variable overheads rate per hour: 10 £

• Actual labour rate per hour: 606,320/58,300 = 10.4 £

• Variable overheads price variance: AQ × AP – AQ x SP

• Variable overheads price variance: 58,300 x 10.4 – 58,300 x 10 = 23,320 A

• Variable overheads efficiency variance: AQ × SP – SQ × SP

• Variable overheads efficiency variance: 58,300 x 10 – (26,500 x 2) x 10 = 53,000 A

Standard hours
for the actual
volume
• Fixed overhead

• Spending variance = AC – SC
• Spending variance = 164,000 – 175,000 = (11,000) F
 Favourable Adverse
$ $ $

Budgeted profit 1,300,000 (25,000 x 59 – 175,000)

Sales price variance 79,500
Sales volume variance 88,500
Cost variances
Materials Price 42,665
Efficiency 39,750
Labour Price 40,810
Efficiency 119,250
Var OH Spending 23,320
Efficiency 53,000
Fix OH Spending 11,000
180,060 317,735 (137,675)
Actual profit 1,162,325
• Sales price variance adverse and sales volume variance favorable – this could be due the fact that this
company wanted to decrease sales price in order to increase sales volume. Adverse price variance is
lower than favourable volume variance what is financially worthwhile.
• Materials price variance is adverse (higher purchase price than planne) maybe because of the change of
suppliers or because of the better quality of purchased material. Since materials efficiency variance is
favorable, we can conclude that it is because of better material quality.
• Labour price variance is favourable, but efficiency variance is adverse. The reason could be that less
qualified staff was employed, what caused lower labour rate but also lower efficiency.
• Variable overhead efficiency variance is adverse and is connected with adverse labour efficiency
variance because variable overheads are based on labour hours.
• Fixed overheads spending variance is favourable maybe because of lower rent.