ACMB223 Management Accounting

STANDARD COSTING AND VARIANCE ANALYSIS

Learning Outcomes

At the end of this lecture, students should be able to:

 Explain the purpose and process involved in establishing cost standards for product and services
 Explain types of cost standards
 Calculate and analyze variance on materials, labor, variable and fixed overhead, and sales.
 Determine the mix and yield variances and planning and operational variances
 Reconcile actual profit and budgeted profit.

Standard Costing

 Standard Cost is the planned unit cost of the product, component or service produced in a period. The
standard cost may be determined on a number of bases. The main use of standard costs is in
performance measurement, control, stock valuation and in the establishment of selling prices. (CIMA
Official Terminology)
 Standard cost is an estimated unit cost, prepared in advance and calculated from management’s
expectations of:
1. Efficiency levels in the use of materials and labour
2. The expected price of materials, labour and expenses
3. Budgeted overhead costs and budgeted volumes of activity.
 It is a planned cost that should be incurred in making the unit of product.

Illustration of standard cost of a product:

STANDARD COST CARD

Product: Superkool, No 12345

Total Costs
Unit Cost Quantity
(RM)
Direct materials
A RM2.00 per kg 6 kg 12.00
B RM3.00 per kg 2 kg 6.00
C RM4.00 per litre 1 litre 4.00
Direct labour
Grade I RM4 per hr 3 hours 12.00
Grade II RM5.40 per hr 5 hours 27.00
Variable production overheads RM1.00 per hour 8 hours 8.00
Fixed production overheads RM3.00 per hour 8 hours 24.00
Standard cost of production 93.00

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 Standard costing is generally best suited to organisations with repetitive activities.
 It is probably most relevant to manufacturing organisations with repetitive production processes.
 Standard costing cannot be applied easily to non-repetitive activities because there is no clear basis for
observing and recording operations. It is difficult to determine a clear standard.
 Two commonly used approaches are used to set standard costs.
1. Past historical records can be used to estimate labour and material usage.
2. Engineering studies can be used. This may involve a detailed study or observation of operations in
terms of material, labour and equipment usage.
 Purposes of standard costing:
1. To provide a prediction of future costs that can be used for decision-making.
2. To provide a challenging target that individuals are motivated to achieve.
3. To assist in setting budgets and evaluating performance.
4. To act as a control device by highlighting those activities those do not conform to plan.
5. To simplify the task of tracing costs to products for inventory valuation.
• Two types of standard costing system:
1. Absorption costing
2. Marginal/Variable costing

Standard Costing Relationship with Budgetary control:

 Standard costing concerns with plans that relate specifically to single cost units, whereas the budgetary
control system will be more concerned with overall company departmental performance. Both systems
incorporate some analysis of variances.
 While each system can operate independently, they are best used in conjunction with one another, for
example, the standards being used as a basis for budgeted figures.
 Standard Costing:
• Main Aim: A product costing system.
• Main Output: A standard cost per unit.
 Budgeting:
 Main Aim: An overall company-wide planning system.
 Main Output: A defined plan for a period in terms of values

Types of Standard

 There are four main types of standard:

Attainable standards
 They are based upon efficient (but not perfect) operating conditions.
 The standard will include allowances for normal material losses, realistic allowances for fatigue,
machine breakdowns, etc.
 These are the most frequently encountered type of standard.
 These standards may motivate employees to work harder since they provide a realistic but challenging
target.

Basic standards
 These are long-term standards, which remain unchanged over a period of years.
 Their sole use is to show trends over time for such items as material prices, labour rates and efficiency
and the effect of changing methods.
 They cannot be used to highlight current efficiency.
 These standards may demotivate employees if, over time, they become too easy to achieve and, as a
result, employees may feel bored and unchallenged.

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Current standards
 These are standards based on current working conditions.
 They are useful when current conditions are abnormal and any other standard would provide
meaningless information.
 The disadvantage is that they do not attempt to motivate employees to improve upon current working
conditions and, as a result, employees may feel unchallenged.

Ideal standards
 These are based upon perfect operating conditions.
 This means that there is no wastage or scrap, no breakdowns, no stoppages or idle time; in short, no
inefficiencies.
 In their search for perfect quality, Japanese companies use ideal standards for pinpointing areas
where close examination may result in large cost savings.
 Ideal standards may have an adverse motivational impact since employees may feel that the standard
is impossible to achieve.

Variance Analysis

What is variance analysis?

• The evaluation of performance by means of variances, whose timely reporting should maximise the
opportunity for managerial action.’ CIMA Official Terminology, 2005
• Variance analysis is a key element of performance management and is the process by which the total
difference between flexed standard and actual results is analysed.
• A number of basic variances can be calculated. If the results are better than expected, the variance is
favourable (F). If the results are worse than expected, the variance is adverse (A).
• It is important to be able to:
 calculate a variance
 explain the meaning of the variance calculated
 identify possible causes for each variance.
 Once the variances have been calculated, an operating statement can be prepared reconciling actual
profit to budgeted profit, under marginal costing or under absorption costing principles.
 Basic variances can be calculated for sales, material, labour, variable overheads and fixed overheads.

Sales Variance

Calculation

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 Margin = contribution per unit (marginal costing) or profit per unit (absorption costing).

Causes of sales variances

Variance Favourable Adverse
Sales Price  Unplanned price increase  Unplanned price reduction

Sales Valume  Additional demand  Unexpected fall in demand

 Production difficulties

Materials Variance

Calculation

Causes of material variances

Variance Favourable Adverse

Material  Poorer quality materials  Higher quality materials

Price  Discount given for buying bulk  Change to a more expensive supplier
 Change to a cheaper supplier  Unexpected price increase
 Incorrect budgeting encountered
 Incorrect budgeting

Material  Higher quality materials  Poorer quality materials

Usage  More efficient use of material  Less experienced staff using more
 Change is product specification materials
 Incorrect budgeting  Change is product specification

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  Incorrect budgeting
 Careless handling of materials

 The material price variance and the material usage variance may be linked. For example, the purchase
of poorer quality materials may result in a favourable price variance but an adverse usage variance.
 Material waste may be a normal part of a process and could be caused by evaporation, scrapping or
testing
 Waste would affect the material usage variance. Expected waste can be built into the standards used,
so only excessive (abnormal) waste would contribute towards the usage variance.
 Material usage variance can be subdivided into a material mix variance and a material yield variance
when more than one material is used in the product.
 If the different materials are not interchangeable, then separate price and usage variances can be
calculated. However, if substitution of one material for another can occur, then it is more useful to
calculate mix and yield variances.

Labour Variance

Calculation

Causes of labour variances

Variance Favourable Adverse

Labour rate  Lower skilled staff  Higher skilled staff

 Cut in overtime/bonus  Increase in overtime/bonus
 Incorrect budgeting  Incorrect budgeting
 Unforeseen wage increase

Labour  Higher skilled staff  Lower skilled staff

efficiency  Improved staff motivation
 Incorrect budgeting
 Higher quality materials
 Fall in staff motivation
 Incorrect budgeting
 Inferior quality materials
 Failure to maintain machinery in proper condition
 Introduction of new tools

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 The labour rate variance and the labour efficiency variance may be linked. For example, employing
more highly skilled labour may result in an adverse rate variance but a favourable efficiency variance.
 Idle time occurs when employees are paid for time when they are not working e.g. due to machine
breakdown, low demand or stockouts.
 If idle time exists an idle time labour variance should be calculated.

Variable Overhead Variance

Calculation

Causes of variable overhead variances

Variance Favourable Adverse

Variable overhead  Unexpected saving in cost of  Unexpected increase in the

expenditure services cost of service
 More economic use of services  Less economic use of service
 Incorrect budgeting  Incorrect budgeting

Variable overhead  As for labour efficiency  As for labour efficiency

efficiency

Fixed Overhead Variance

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 Calculation

 Marginal costing system

 With a marginal costing profit and loss, no overheads are absorbed, the amount spent is simply
written off to the income statement.
 So with marginal costing the only fixed overhead variance is the difference between what was
budgeted to be spent and what was actually spent, i.e. the fixed overhead expenditure variance.

 Absorption costing system

 Under absorption costing we use an overhead absorption rate to absorb overheads. Variances
will occur if this absorption rate is incorrect (just as we will get over/under-absorption).
 So with absorption costing we calculate the fixed overhead expenditure variance and the fixed
overhead volume variance (this can be split into a capacity and efficiency variance).

Causes of fixed overhead variances

Variance Favourable Adverse
Fixed o/h  Decrease in price  Increase in price
expenditure  Seasonal effects  Seasonal effects

Fixed o/h volume  Increase in production volume  Decrease in production volume

 Increase in demand  Decrease in demand
 Change is productivity of labour  Production lost through strikes

Fixed o/h capacity  Hours worked higher than  Hours worked lower than
budget budget
Fixed o/h  As per labour efficiency  As per labour efficiency
efficiency

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Example 1
A company manufacture one product, and the entire product is sold as soon as it is produced. There are
no opening or closing stock and work in progress is negligible. The company operates a standard costing
system and analysis of variance is made every month. The standard cost for the product is as follows:

RM
Direct materials 0.5 kg @ RM4 per kg 2.00
Direct wages 2 hours @ RM2 per hour 4.00
Variable overheads 2 hours @ RM0.30 per hour 0.60
Fixed overhead 2 hours @ RM3.70 per hour 7.40
Standard cost 14.00
Standard profit 6.00
Standard selling price 20.00

Budgeted output for January was 5,100 units. Actual results for January were as follows:
Production of 4,850 units was sold for RM95,600
Materials consumed in production amounted to 2,300 kg at a total cost of RM9,800
Labour hours paid for amounted to 8,500 hours at a cost of RM16,800
Actual operating hours amounted to 8,000 hours
Variable overheads amounted to RM2,600
Fixed overheads amounted to RM42,300

Required:
(a) Calculate all variances
(b) Reconcile the budgeted profit with the actual profit.

Answer:
(a) Calculate all variances
Workings RM
Actual quantity sold x Actual price
Actual quantity sold x Standard price
Selling price variance

Actual quantity sold x Standard Margin

Budgeted quantity sold x Standard Margin
Sales Volume variance

Actual quantity bought x Actual purchase price

Actual quantity bought x Standard purchase price
Material price variance

Actual quantity used x Standard purchase price

Standard quantity used x Standard purchase price
Material usage variance

Actual labour hours x Actual labour rate

Actual labour hours x Standard labour rate
Labour rate variance

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Actual labour hours worked x Standard labour rate
Standard labour hours x Standard labour rate
Labour efficiency variance

Actual labour hours worked x Standard labour rate

Actual labour hours paid x Standard labour rate
Idle time variance

Actual labour hours worked x Actual variable OH rate

Actual labour hours worked x Standard variable OH rate
Variable overhead rate variance

Actual labour hours worked x Standard variable OH rate

Standard labour hours worked x Standard variable OH
Variable overhead efficiency variance

*Same hours as labour efficiency variance but different rate

Actual fixed overhead costs

Budgeted hours x Standard fixed overhead rate
Fixed overhead expenditure variance

Budgeted hours x Standard fixed overhead rate

Actual standard hours x Standard fixed overhead rate
Fixed overhead volume variance

Budgeted hours x Standard fixed overhead rate

Actual hours x Standard fixed overhead rate
Fixed overhead capacity variance

Actual hours x Standard fixed overhead rate

Standard hours for actual production x Standard fixed
overhead rate
Fixed overhead efficiency variance

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(b) Reconcile the budgeted profit with the actual profit.

RM RM
Budgeted profit (5,100 units x RM6)
Selling price variance
Sales volume variance

Actual sales (RM95,600) – standard cost of sales (4,850 x RM14)

Cost variances F A
Material price
Material usage
Labour rate
Labour efficiency
Idle time
Variable overhead expenditure
Variable overhead efficiency
Fixed overhead expenditure
Fixed overhead volume

Actual profit for January

Check
Actual results RM RM
Sales 95,600
Materials 9,800
Labour 16,800
Variable overhead 2,600
Fixed overhead 42,300
Total costs 71,500
Actual profit 24,100

Materials Mix and Yield Variance

 Material usage variance can be subdivided into a material mix variance and a material yield variance
when more than one material is used in the product.
 If the different materials are not interchangeable, then separate price and usage variances can be
calculated. However, if substitution of one material for another can occur, then it is more useful to
calculate mix and yield variances.

Mix variance
 Mix variance occurs when the materials are not mixed or blended in standard proportions and it is a
measure of whether the actual mix is cheaper or more expensive than the standard mix.
 A mix variance is used to monitor the cost of material. For instance, if more of an expensive material
has been used and less of a cheap material, then the overall cost will be higher - and the variance
adverse.

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 Method :
1. Set up the following table :

2. Calculate the total of the AQAM column (in kgs, litres, metres etc) and copy the total across to the
next 'AQSM' column :

3. Share this total 'upwards' into the standard mix, which will be given as a proportion in the question
or in the standard cost card :

4. In the 'difference' column, work line by line and find the difference between the AQSM and the
AQAM. The total of the difference should be equal to 0. In the last column, multiply the
difference by the standard price to get the mix variance.

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Materials Mix Variance
 Materials ‘mix’ refer to the quantity of each material that is used to make our product i.e. our inputs.
 Material ‘yield’, on the other hand, is about how much of our product is produced, i.e. our output.

Example 2:
Chemical, C, that uses both chemicals A and B to make it. Chemical A has a standard cost of RM20 per litre
and chemical B has a standard cost of RM25 per litre. Research has shown that various combinations of
chemicals A and B can be used to make C, which has a standard selling price of RM30 per litre. The best
two of these combinations have been established as:

Mix 1 10 litres of A and 10 litres of B will yield 18 litres of C

Mix 2 8 litres of A and 12 litres of B will yield 19 litres of C

Required: Determine the optimum mix and calculate standard cost per unit of C.
Solution

Example 3:
Assume that the standard mix has been set (Mix 2: 8 litres of A and 12 litres of B will yield 19 litres of C.
1,850kg of C is produced, using a total of 900kg of material A and 1,100kg of material B (2,000kg in total).
The actual costs of materials A and B were at the standard costs of RM20 and RM25 per kg respectively.
Calculate the materials mix variance.

Formula = (Actual quantity in standard mix proportions – actual quantity used) x standard cost

Actual usage in actual

Actual usage in standard proportions proportions Var.

RM RM RM

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Yield variance
 A yield variance measures the efficiency of turning the inputs into outputs. If the yield variance is
adverse, it suggests that actual input is lower than the expected output. This could be due to labour
inefficiencies, higher waste, inferior materials, or using a cheaper mix with a lower yield.
 Method 1 : The 'total' method

 Method 2 : The 'individual' method

'SQSM' is the standard quantity of material used for actual production, in the standard mix.

Materials yield variance

 Is a difference between the actual level of output for a given set of inputs and the standard output for
a given set of inputs.

Example 4:
Assume that the standard mix has been set (Mix 2: 8 litres of A and 12 litres of B will yield 19 litres of C).
1,850kg of C is produced, using a total of 900kg of material A and 1,100kg of material B, (2,000kg in total).
The actual costs of materials A and B were at the standard costs of RM20 and RM25 per kg respectively.
There is a loss rate of 5% in process.

Required: Calculate the materials yield variance.

Formula: (Actual yield – standard yield from actual input of material) x standard cost per unit of output

Solution 4:
Materials yield variance
= (Actual yield – standard yield from actual input of material) x standard cost per unit of output.
=

Standard yield for

Actual actual quantities Standard
yield input Difference cost per kg Var.

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Interpretation of material mix and yield variances
1. From our example, it can be seen that there is a direct relationship between our materials mix variance
and our materials yield variance.
2. By using a mix of materials that was different from standard, we have resulted in a saving of RM500, in
standard cost terms. However, the downside of this is that our cheaper mix of materials has resulted
in a significantly lower yield of material C than we would have got had our standard mix of materials
been adhered to. This yield was RM1,200 lower than it would have been, which is over double the
amount that we saved by using a cheaper mix of materials.
3. Overall, by netting the two variances off against each other, we have an adverse material usage
variance of RM700 (RM1,200 A less RM500 F).

Example 5
Bedah and Bedul are analysing the main ingredients in their basic pasta sauce
The standard ingredients for one batch of tomato sauce:
RM
Onions 5 kg @ RM2/kg 10
Tomatoes 5 kg @ RM4/kg 20
30

Over the last month, 100 batches of sauce were prepared using the following ingredients:
Onions 600 kg
Tomatoes 900 kg

Required:
Calculate the material mix and yield variance

Material mix variance:

Actual Actual quantity Difference Standard price Variance (RM)
Material quantity Standard mix (RM)/kg
Actual mix
Onions 5 kg
Tomatoes 5 kg

Material yield variance:

Standard quantity Actual quantity Difference Standard price Variance
Material Standard mix Standard mix (RM)/kg (RM)
Onions 5 kg
Tomatoes 5 kg

Interpretation of material mix and yield variances

 Mix - a favourable total mix variance would suggest that a higher proportion of a cheaper material is
being used instead of a more expensive one, hence reducing the overall average cost per unit.
 Yield - an adverse total yield variance would suggest that less output has been achieved for a given
input, i.e. that the total input in volume is more than expected for the output achieved.
 These variances may be interrelated. A favourable material mix variance may lead to an adverse
material yield variance. This is due to differences in quality between the materials used.
 Any change in mix should be judged by the impact on the overall total materials variance.
 The operating statement would include a separate line for each variance.

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 Planning and Operating Variances

 Explaining the causes of variances is a key step in variance analysis. In some cases the cause is:
1. Operational e.g. the price of raw materials went up due to market shortages
2. Due to poor budgeting and planning e.g. an out of date price list were used when setting the
standard cost of materials
3. Often causes are a mixture of planning and operating factors. Some firms seek to make these
distinctions more explicit by separating out planning and operating variances.
 The basic approach is to have two budgets - the original budget and a revised one that takes into
account planning issues. We can then determine two sets of variances:

Planning and operational variances for sales

 The sales volume variance can be sub-divided into a planning and operational variance:

 When applying planning and operating principles to cost variances (material and labour), care must
be taken over flexing the budgets. One accepted approach is to flex both the original and revised
budgets to actual production levels:

Formula:
Materials:
Planning price variance (Revised Price – SP) x Revised Flexed Quantity
Planning usage variance (Revised Flexed Quantity – SQ) x SP
Operational price variance (AP – Revised Price) x AQ
Operational usage variance (AQ – Revised Flexed Quantity) Revised price
Labours:
Rate planning variance (Revised rate – SP) x Revised Flexed Hours
Efficiency planning variance (Revised standard hours – SH) x SR
Rate operating variance (AR – Revised Rate) x AH
Efficiency operating variance (AH – Revised Flexed Hours) Revised rate

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Example 6
BJaya Sdn Bhd manufactures ‘Stops’ which is estimated require 2 kg of material XYZ at RM10/kg. In week
21 only 250 Stops were produced although budgeted production was 300 units. 450 kg of XYZ were
purchased and used in the week at a total cost of RM5,100. Later it was found that the standard had failed
to allow for a 10% price increase throughout the material supplier's industry and the standard quantity has
reduced by 12% due to the use of new technology. BJaya carries no stocks.

Required:
(a) Calculate the planning and operational variance for both material price and usage variances.
Planning price variance (Revised Price – SP) x Revised Flexed Quantity

Planning usage variance (Revised Flexed Quantity – SQ) x SP

Operational price variance (AP – Revised Price) x AQ

Operational usage variance (AQ – Revised Flexed Quantity) Revised price

(b) Assess the performance of the production manager.

 The production manager is subject to external factors which appear beyond his control.
 The price of Stop has increase throughout the material supplier's industry which is beyond the
control of the production manager. This is a planning error and should not form part of any
assessment of his performance.
 Similarly the reduction in the standard quantity by 12% due to the use of new technology is
considered as planning error, therefore to be ignored in the production manager assessment.
 The performance of the production manager should be based on the operational variances (and
any relevant qualitative factors). The production manager has paid an extra RM150 which reflect a
poor performance.
 Equally poor performance is shown in the efficiency of using the material which show an extra
spending of RM110. However, this may be the result of using new technology which is not familiar
to the workers. This may be improved after some time when the workers are more familiar with
the new technology.
 The causes of lower units of actual production by 50 units should be investigated. If it is due to
external factor such as lower market, it should not be included in the assessment of the production
manager.
 However if it is due to internal factors such as longer time taken to complete a unit of Stop, then
that will be included in the production manager assessment. This will require the computation of
labour variance.
 Based on material operational variance, the production manager shows a poor performance.

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Example 7:
Northcliffe Feeds Ltd manufacture a standard animal feed. The predetermined standards for the budget
period Jan-March 2005 were set by management in October 2004.

Standard hours per tonne of product 1.1

Standard direct labour rate per hour RM8.50
Standard usage of material per tonne of product 1.2 tonnes
Standard price of material RM70 per tonne

Research shows that in the quarter ended 31 March 2005 the prevailing market price of material had been
RM71 per tonne. Since the budget was set the wage rate had increased to RM8.75 per hour, national pay
award.

During the quarter modifications to plant and machinery shows that direct labour hours per unit should be
1.05 per tonne of product and that standard usage would reduce to 1.175 tonnes per tonne of product.
During the quarter ended 31 March 2005 activity and costs showed:

Actual production 15,400 tonnes

Raw material usage 16,555 tonnes
Actual cost of raw materials used RM1,191,960
Actual direct labour cost 16,632 hours RM143,035
Required:
(a) Compute material and labour variance
Variance Workings
MPV
AQ(SP-AP)
(AQ X SP) – (AQ X AP)

AQ - Actual quantity bought

AP - Actual purchase price
SP - Standard purchase price
MUV
SP(SQ-AQ)
(SP X SQ) – (SP X AQ)

SQ - Standard quantity used

AQ - Actual quantity used
SP - Standard purchase price

LRV
AH(SR-AR)
(AH x SR) – (AH X AR)

AH - Actual labour hours

AR - Actual labour rate
SR - Standard labour rate

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 LEV
SR(SH-AH)
(SR X AH) – (AR X AH)
AH- Actual labour hours worked
SR - Standard labour rate
SH- Standard labour hours x

APAQ SPAQ SPSQ

MPV= MUV =

ARAH SRAH SRSH

LRV = LEV =

(b) Compute material and labour operational and planning variances.

Materials
Planning price variance (Revised Price – SP) x Revised Flexed Quantity

Planning usage variance (Revised Flexed Quantity – SQ) x SP

Operational price variance (AP – Revised Price) x AQ

Operational usage variance (AQ – Revised Flexed Quantity) Revised price

Labours
Rate planning variance (Revised rate – SP) x Revised Flexed Hours

Efficiency planning variance (Revised standard hours – SH) x SR

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 Rate operating variance (AR – Revised Rate) x AH

Efficiency operating variance (AH – Revised Flexed Hours) Revised rate

RP RFQ SP RFQ SP SQ

MPPV= MUPV =

AP AQ RP AQ RP RFQ

MPOV = MUOV =

RR RFH SR RFH SR SH

LRPV= LEPV =

AR AH RR AH RR RFH

LROV = LEOV =

Planning and operational analysis

The first step in the analysis is to calculate:
(1) Actual Results
(2) Revised flexed budget (ex-post).
(3) Original flexed budget (ex-ante).

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 Operating Statements

Operating statement under absorption costing

 The purpose of calculating variances is to identify the different effects of each item of cost/income on
profit compared to the expected profit. These variances are summarised in a reconciliation statement
or operating statement.
 Operating statement under absorption costing

Operating statement under marginal costing

 The operating statement under marginal costing is the same as that under absorption costing except;
 a sales volume contribution variance is included instead of a sales volume profit variance
 the only fixed overhead variance is the expenditure variances
 the reconciliation is from budgeted to actual contribution then fixed overheads are deducted to
arrive at a profit.
 Operating statement under marginal costing (MC)

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 Tutorial Questions

Hilton & Platt – Problem 10-33, 10-34, 11-42

Drury IM17.1 and IM17.8

Question 1

Standard cost of Product A RM

Materials (5kgs x RM10 per kg) 50.00
Labour (4hrs x RM5 per hr) 20.00
Variable o/hds (4 hrs x RM2 per hr) 8.00
Fixed o/hds (4 hrs x RM6 per hr) 24.00
102.00

Budgeted results ACTUAL Results

Production: 1,200 units
Production: 1,000 units
Sales: 1,000 units
Selling price: RM150 per unit Sales: 900 units
Materials: 4,850 kgs, RM46,075
Labour: 4,200 hrs, RM21,210
Variable o/hds: RM9,450
Fixed o/hds: RM25,000
Selling price: RM140 per unit

Required to compute:
a) Material total variance
b) Material price variance
c) Material usage variance
d) Labour total variance
e) Labour rate variance
f) Labour efficiency variance
g) Variable overhead total variance and all sub- variances
h) Fixed Production overhead total Variance and all sub-variances
i) Selling price variance

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Question 2
Arsenal, a manufacturing company; produces a single product and the standard cost is:

RM
Direct material 6 kilos @ RM2 per kilo 12.00
Direct labour 5 hours @ RM6 per hour 30.00
Variable overhead 5 hours @ RM1 per hour 5.00
Fixed overhead 5 hours @ RM10 per hour 50.00
Total Standard Cost 97.00

Budgeted Production is 2000 units per period but actual production for Period 1 is only 1,800 units.
The actual costs for Period 1 are:
RM
Direct material 12,600 kilos 27,720
Direct labour 9,900 hours 60,390
Variable overhead 9,000
Fixed overhead 102,000

Calculate for Period 1:

i. Material price and usage variances.
ii. Labour rate and efficiency variances.
iii. Variable expenditure variances.
iv. Fixed overhead expenditure variance.
v. Give TWO possible reasons for the material and labour variances.

Question 3
Adawiy Lab (M) produces various antibiotics for hospital and clinic use. One antibiotic, called Augmentin is
prepared using an elaborate distilling process. The company has developed standard costs for one unit of
Augmentin, as follows:
Standard Standard Standard
Quantity Price/ Rate (RM) Cost (RM)
Direct materials 2.5 kg 20.00 per kg 50.00
Direct labour 1.4 hours 12.5 per hour 17.50
Variable manufacturing overhead 1.4 hours 3.5 per hour 4.90
72.40

During December, the following activity was recorded by the company relative to production of Augmentin:
1. Material purchased 12,000 kg at a cost of RM225,000.
2. There was no beginning inventory of materials; however, at the end of the month 2,500 kg of
material remained in ending inventory.
3. The company employs 35 lab technicians to work on the production of Augmentin. During December,
each worked an average of 160 hours at an average rate of RM12.00 per hour.
4. Variable manufacturing overhead is assigned to Augmentin on the basis of direct labour hours.
Variable manufacturing overhead costs during November totaled RM18,200.
5. During December, 3750 good units of Augmentin were produced.
The company’s management is anxious to determine the efficiency of Augmentin production activities.

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Required:
(i) Compute the price and quantity variances for direct material used in the production of Augmentin.
The materials were purchased from a new supplier who is anxious to enter into a long term
purcahase contract. Would you recommend that the company sign the contract? Explain.
(ii) Compute the rate and efficiency variances for direct labour employed in the production of
Augmentin.
(iii) Compute the variable overhead spending and efficiency variances.
(iv) Explain how standard is developed.
(v) Give TWO (2) reasons why labour efficiency variances arise.
(vi) Describe TWO (2) advantages a system of standard costing might bring to a company.

Question 4
The following standard costs were developed for one of the products of CH Manufacturing Sdn. Bhd.:
STANDARD COST CARD
PER UNIT

Direct materials: 6 feet x RM2 per foot RM12.00

Direct labour: 5 hours x RM3 per hour 15.00
Variable overhead: 5 hours x RM1 per hour 5.00
Fixed overhead: 5 hours x RM5 per hour 25.00
Total standard cost per unit RM57.00

The following information is available regarding the company's operations for the period:

Units produced 20,000

Materials purchased 130,000 feet at RM2.10 per foot
Materials used 110,000 feet
Direct labour 115,000 hours at RM3.25 per hour
Overhead incurred:
Variable RM112,500
Fixed RM440,000

Budgeted fixed overhead for the period is RM450,000, and the standard fixed overhead rate is based on
expected capacity of 90,000 direct labor hours. The materials price variance is computed at the time of
purchase.

Required:
(a) Calculate the materials price and material usage variance.
(b) Calculate the labour rate and labour efficiency variance.
(c) Calculate the variable overhead spending and variable overhead efficiency variance.
(d) Calculate the fixed overhead spending and fixed overhead volume variance.
(e) Explain how standard are developed.
(f) Give TWO (2) reasons why labour efficiency variances arise.
(g) Describe TWO (2) advantages a system of standard costing might bring to a company.

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 Question 5
Sleep Focus Sdn Bhd (SFSB) manufactures bed sheets and pillowcases which it supplies to a major hotel
chain. It uses a just-in-time system and holds no inventories. The standard cost for the cotton which is used
to make the bed sheets and pillowcases is RM5 per m2. Each bed sheet uses 2 m2 of cotton and each
pillowcase uses 0·5 m2. Production levels for bed sheets and pillowcases for November were as follows:

Budgeted production levels (units) Actual production levels (units)

Bed sheets 120,000 120,000
Pillowcases 190,000 180,000

The actual cost of the cotton in November was RM5·80 per m2. 248,000 m2 of cotton was used to make the
bed sheets and 95,000 m2 was used to make the pillowcases. The world commodity prices for cotton
increased by 20% in the month of November. At the beginning of the month, the hotel chain made an
unexpected request for an immediate design change to the bedsheet and pillowcases. The new design
required 10% more cotton than previously. It also resulted in production delays and therefore a shortfall in
production of 10,000 pillowcases in total that month.

The production manager at SFSB is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.

Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow cases,
and in total:
I. Material price planning variance;
II. Material price operational variance;
III. Material usage planning variance;
IV. Material usage operational variance.
[12 marks]
(b) Assess the performance of the production manager for the month of November.
[8 marks]

Question 6
Industrial Bins Enterprise (IBE) manufactures large plastic bins for industrial usage. One of IBE’s larger
customers uses model T567. IBE located a plant dedicated to the manufacture of T567 across the street
from the customer’s plant. To help ensure cost efficiency a standard costing system was installed in the
plant. IBE uses an absorption costing system to report profits and value production.
IBE is currently reviewing its operating results for the year ended 31 August 2017. The following information
is available:

1. Last year, when the budget was being prepared, it was expected that T567 would be sold for
RM105 each. The budget was finalised based on production and sales of 6,000 units of T567
2. The actual results for the year to 31 August 2017 are shown below:
Number of T567 produced and sold 6,120 units
Total sales value RM240,640
Direct materials: 13,500 kilograms of plastic used at RM385,100
Direct labour: 1,640 hours worked for RM16,320
Variable production overhead RM2,900
Fixed production overhead RM4,545
3. Each plastic bin requires 2.2 kg plastic and when the budget was prepared IBE had an agreement
with a local supplier to purchase the plastic at RM28.50 per kg.

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4. IBE has excellent skilled workers and the latest machine technology enables it to produce a bin in
0.3 direct labour hours. The standard direct labour rate was set at RM10.50 per hour.
5. Standard variable production overhead was set at RM1.80 per direct labour hour.
6. IBE had budgeted fixed production overhead for the year to 31 August 2017 at RM4,500.

Required:
(a) Calculate the standard costs of production for product T567.
[4 marks]
(b) Calculate the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Variable overhead expenditure variance
(vi) Variable overhead efficiency variance
(vii) Fixed production overhead expenditure variance
(viii) Fixed production overhead volume variance
(ix) Selling price variance
(x) Sales volume variance
[11 marks]
(c) Explain FIVE (5) purposes of standard costing
[5 marks]

Question 7
Comel Electronic Bhd (CEB) is an electronics company which makes two types of televisions – plasma screen
TVs and LCD TVs. It operates within a highly competitive market and is constantly under pressure to reduce
prices. CEB operates a standard costing system and performs a detailed variance analysis of both products
on a monthly basis. Extracts from the management information for the month of November are shown
below:

Notes
Total number of units made and sold 1,400 1
Material price variance RM28,000 A 2
Total labour variance RM6,050 A 3

Notes
1. The budgeted total sales volume for TVs was 1,180 units, consisting of an equal mix of plasma screen
TVs and LCD screen TVs. Actual sales volume was 750 plasma TVs and 650 LCD TVs. Standard sales
prices are RM1,350 per unit for the plasma TVs and RM1,300 per unit for the LCD TVs. The actual
sales prices achieved during November were RM1,330 per unit for plasma TVs and RM1,290 per unit
for LCD TVs. The standard contributions for plasma TVs and LCD TVs are RM990 and RM950 per unit
respectively.
2. The sole reason for this variance was an increase in the purchase price of one of its key components,
X. Each plasma TV made and each LCD TV made requires one unit of component X, for which CEB’s
standard cost is RM260 per unit. Due to a shortage of components in the market place, the market
price for November went up to RM285 per unit for X. CEB actually paid RM280 per unit for it.
3. Each plasma TV uses 2 standard hours of labour and each LCD TV uses 1·5 standard hours of labour.
The standard cost for labour is RM14 per hour and this also reflects the actual cost per labour hour
for the company’s permanent staff in November. However, because of the increase in sales and
production volumes in November, the company also had to use additional temporary labour at the

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 higher cost of RM18 per hour. The total capacity of CEB’s permanent workforce is 2,200 hours
production per month, assuming full efficiency. In the month of November, the permanent
workforce were wholly efficient, taking exactly 2 hours to complete each plasma TV and exactly 1·5
hours to produce each LCD TV. The total labour variance therefore relates solely to the temporary
workers, who took twice as long as the permanent workers to complete their production.

Required:
(a) Calculate the following for the month of November, showing all workings clearly:
i. The sales price variance and sales volume contribution variance;
ii. The material price planning variance and material price operational variance;
iii. The labour rate variance and the labour efficiency variance.
(b) Explain the reasons why CEB would be interested in the material price planning variance and the
material price operational variance.

Question 8
Nuur Zayn Trading (NZT) has grown steadily in the industry for the last 7 years due to the worth-to-buy
product called Carbonarc. NZT currently absorbs fixed production overheads on the basis of standard
labour hours of production. The normal annual production volume is 56,100 standard labour hours.

In 2016, the new sales manager of NZT received a report of the variance analysis. The analysis shows the
following findings:
RM
Sales volume variance Favourable 28,000
Sales price variance Unfavourable 23,000
Material price variance Favourable 100,000
Material usage variance Unfavourable 110,000
Labour rate variance Unfavourable 44,000
Labour efficiency variance Favourable 50,000
Fixed overhead expenditure variance Favourable 9,000
Fixed overhead volume variance Unfavourable 17,000
The new standard cost for 2017 was discussed and established. Standard selling price was decided at
RM110 per unit. Each unit of Carbonarc requires 4.5 kg of material E and this material will be supplied by a
supplier at RM5 per kg. It takes 2.2 direct labour hours to complete a unit of Carbonarc at a cost of RM12
per hour worked. The fixed production overhead is budgeted at RM7.50 per labour hour. NZT never holds
stocks of finished goods, but instead sells all units of output in the period in which they are produced. NZT
had budgeted to produce and sell 25,500 units of Carbonac in 2017.

At the end of 2017, sales department reported that 27,000 units were actually produced and sold. Details
of the actual cost incurred and actual revenue generated in 2017 are as follows:
RM
Sales 2,835,000
Direct material (148,500 @RM4.5 per kg) 668,250
Direct labour (51,300 hrs @ RM12.5 per hour) 641,250
Fixed production overheads 360,000
Profit 1,165,500

Required:
(a) Explain briefly THREE (3) purposes of variance analysis.
[3 marks]

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(b) Explain briefly the possible reasons that might lead to the significant differences in sales price,
material usage, and labour rate variances in the year 2016 as shown in a report received by the
new sales manager.
[6 marks]

(c) Calculate the following variances in 2017:

(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Fixed overhead expenditure variance
(vi) Fixed overhead volume variance
(vii) Sales price variance
(viii) Sales volume variance
[11 marks]
Question 9
Hugper Sdn. Bhd. (HSB) manufactures quality disposable diapers in Malaysia. It is a trusted brand name and
has good reputation in creating quality and affordable baby and kid disposable diapers for over 15 years.
Apart from producing disposable diapers, HSB also manufactures comfortable pull up training pants and
little mover pants. It uses a just-in-time system and holds no inventories.

The standard cost for the breathable cotton, which is used to make the comfortable pull up training pants
and little mover pants, is RM6 per meter. Each pull up training pants uses 1 meter of breathable cotton and
each little mover pants uses 0.6 meter. Budgeted production levels for comfortable pull up training pants
and little mover pants for August were as follow:

Production units
Pull up training pants 200,000
Little mover pants 200,000

The actual cost of the breathable cotton in August was RM6.50 per meter, 250,000 meter of breathable
cotton was used to make the comfortable pull up training pants and 98,000 meter was used to make the
little mover pants. The actual production units of comfortable pull up training pants and little mover pants
are as follow:

Production units
Pull up training pants 200,000
Little mover pants 190,000

The world commodity prices for breathable cotton increased by 20% in the month of August. At the
beginning of the month, an unexpected request is made by customers for an immediate change of little
mover pants and pull up training pants to a newly designed diapers. The new design requires 10% more
breathable cotton than previously.

The production manager at HSB is responsible for all buying and any production issues, although he is not
responsible for the setting of standard costs.

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Required:
(a) Calculate the following variances for the month of August, for both comfortable pull up training
pants and little mover pants:

(i) Material price planning variance.

[4 marks]

(ii) Material usage planning variance.

[3 marks]

(iii) Material price operating variance.

[2.5 marks]

(iv) Material usage operating variance.

[2.5 marks]

(b) Based on your answer in part (a) above, evaluate the performance of the production manager for
the month of August.
[4 marks]

(c) Describe TWO (2) methods of setting standards.

[4 marks]

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