Example 11.

1
Cami’s Beautiful Baskets, a basket manufacturing company, produces a variety of baskets. One of the
products is a wicker basket. The product requires a single operation. The company uses an absorption
costing system for internal profit measurement purposes and also applied the just-in-time system. Te
standard cost for this operation is presented in the following standard cost card:
R
Standard selling price 88.00
Standard cost per unit 77.00
Direct materials:
Wood: 1 m at R15 per metre 15.00
Willow: 2 m at R10 per metre 20.00
Direct labour (3 hours at R8 per hour) 24.00
Variable overheads (3 hours at R2 per hour) 6.00
Fixed overheads (3 hours at R4 per hour) 12.00
Standard profit per unit 11.00

Cami’s Beautiful Baskets plans to produce 8 000 units of the wicker basket for craft festival to be held in
December when many tourists are expected. The budgeted costs based on the information contained in the
standard cost card are as follows:
Budgeted based on the above standard costs and output of 8 000 units:
Sales (8 000 units at R88 per unit) R704 000
Less: Cost of sales R616 000
Direct materials:
Wood R120 000
Willow R160 000
Direct labour R192 000
Variable overheads R48 000
Fixed overheads R96 000
Budgeted gross profit R88 000
Annual budgeted fixed overheads are R1 152 000 and are assumed to be incurred evenly throughout the
year.
The festival was a huge success and actual production and sales for the period were 9 000 units.
Manufacturing overheads are charged to production on the basis of direct labour hours. The actual results
for December are:
Sales (9 000 units at R92) R828 000
Less: Cost of sales R704 100
Direct materials:
Wood: 10 100 m at R16 per metre R161 600
Willow: 19 000m at R9 per metre R171 000
Direct labour (28 500 hours at R9 per hour) R256 500
Variable overheads R51 000
Fixed overheads R100 000
Actual profit R87 900
Required:
Prepare a complete variance analysis after reading the relevant section.
Example 11.2
The following standard have been set for labour:

Labour rate R18 per clock hour

Required hours per unit 0.08 hours per unit
Idle time provision 20% of clock hours

The actual results were as follows:

Labour cost R14 960 for 880 clock ours
Actual output 10 000 units

Productive hours were 15% less the hours clocked during the month
Required:
Calculate all relevant labour variance and provide reasons for these variances.
Solution example 11.2
Labour rate variance Idle time variance
(SR – AR) AT (APH – ST) SWHR
(R18 – R17) 880 (880 – 15%) – (880 – 20%) R18 ÷ (1 – 0.20)
R880 F (748 – 704) R22.50
R990 F
Labour efficiency variance
(SQ of labour hours for Actual production – Actual labour hours) Standard productive hour rate
[(0.08 × (1 – 0.20) × 10 000) – (880 – 15%) ×[R18 ÷ (1 – 0.20)]
[(0.064 × 10 000) – 748) R22,50
(640 – 748) R22.50
R2 430 A
Solution example 11.1
Material price variance: (SP – AP) AQ purchased
Wood (R15 – R16 ) 10 100 =R10 100 A
Willow (R10 – R9) 19 000 = R19 000 F
= R8 900 A
Material usage variance : (SQ – AQ used) SP
Wood [(9 000 units × 1 m) – 10 100 m] R15 =R16 500 A
Willow [(9 000 units × 2 m) – 19 000m] R10 =R10 000 A
= R26 500 A
Total material variance: SC – AC
= (9 000 × R35) – R332 600 = R17 600 A
Material mix variance: [AM ×sq ÷ sm) – AQ] SP
Wood [(29 100 × 1÷3) – 10 100] R15
(9 700 – 10 100) R15 = R6 000 A
Willow [(29 100 2 ÷3) – 19 000] R10
(19 400 – 19 000) R10 = R4000 F
= R2000 A
Material yield variance: [SQ – (AM ×sq ÷sm)]SP
Wood [(9000 u × 1 m) – (29 100 × 1 ÷ 30 ]R15
(9 000 – 9 700) R15 = R10 500 A
Willow [(9 000 × 2 m) – (29 100 × 2/3)] R10
(18 000 – 19 400) R10 = R14 000 A
= R24 500 A
Material usage variance = Mix + yield
 R2 000 A + R24 500 A = R26 500 A

Variable overheads expenditure variance

(SR – AR) AT
(R2 – R51 000/ 28 500) 28 500
R6 000 F
Variable overheads efficiency variance
(ST – AT) SR
[(9 000 × 3) – 28 500] r2
R3 000 A
Total variance
SC – AC
(9 000 × R6) – R51 000
R3 000 F
Fixed overheads expenditure variance
BFO – AFO
R96 000 – R100 000
R4 000 A
Fixed overheads volume variance
(ST – BT) SR
[(9 000 × 3) – R24 000] R4
R12 000 F
Fixed overheads volume capacity
(AT – BT) SR
(28 500 – 24 000) R4
R18 000 F
Fixed overheads volume efficiency
(ST – AT) SR
[(9 000 × 3) – 28 500) R4
R6 000 A
Total fixed overheads variance
SC – AC
(9 000 × 12) – R100 000
R8 000 F
Sales price variance (Absorption costing system)
(AP – SP) AVol
(R92 – R88) 9 000
R36 000 F
Sales volume variance
(AV – BV) SCM
(9 000 – 8 000) (88 – 77)
R11 000 F
Total sales variance
AS – BS
[9 000 × (R92 – R77)] – [8 000 × (R88 – R77)]
R47 000 F
OR
Sales price variance + Sales volume variance
Sales variance (Marginal costing system)
Sales Price variance
(AP – SP) AVol
(R92 – R88) 9 000
R36 000 F
Sales volume variance
(AV – BV) SCM
(9 000 – 8 000) (R88 – R65)
R23 000 F
Total sales variance
[(9 000 × (R92 – R65)] – [ 8 000 ×(R88 – R65)]
R59 000 F
Illustrative example 11.3 Sales volume variance
The sales variance for multiple products will be illustrated using the following example.
Table 11.14 Budgeted sales for Sen’s Health Soaps for March
Sales units Sales value Selling Cost price Contribution Total
price margin margin
Sunlight 600 1 800 3 2 1 600
Salvon 300 1 350 4,5 3 1,5 450
Dettol 100 650 6,5 4 2,5 250
1 000 3 800 1 300

and the actual sales were:

Sales units Sales value Selling Cost price Contribution Total

price margin margin
Sunlight 520 1 456 2,8 2 0,8 416
Savlon 290 1 421 4,9 3 1,9 551
Dettol 90 567 6,3 4 2,3 207
900 3 444 1 174

Required:
Calculate sales volume, mix and quantity variance.
Solution:
Sales volume mix variance = (Actual units sold – Actual units sold @ standard mix) Standard margin
Sunlight = [520 – ( 900 × 6/10) ] × R1,00 = (520 – 540) R1 = R20 A
Savlon = [290 – (900 × 3/10) ] × R1,50 = (290 – 270) R1,50 =R30 F
Dettol = [90 – (900 × 1/10)] × R2,50 = (90 – 90) R2,50 = R0
Sales volume variance R10 F
Sales volume quantity variance = (Actual units sold @ standard mix – Budgeted sales quantity)
Standard margin
Sunlight = [(900 × 6/10) – 600] R1,00 = (540 – 600) R1 = 60 A
Savlon = [ (900 × 3/10) – 300 ] R1,50 = (270 – 300)R1,50 = 45 A
Dettol = [(900 × 1/10) – 100] R2,50 = (90 – 100) R2,50 = 25A
Sales volume quantity variance = 130 A
Sales volume variance= (SQ – AQ used) SP
Sunlight =(600 – 520) R1 =80 A
Savlon= (300 – 290) R1,50 = 15A
Dettol = (100 – 90)R2,50 = 25A
Sales volume variance = 120 A
Reconciliation of budgeted profit and actual profit for a standard Absorption costing system
Budgeted net profit 88 000
Add: Sales volume variance 11 000 F
Standard profit 99 000
Add/(less): F / A variance 11 100 A
Sales price variance 36 000F
Material price variance 8 900 F
Wood 10 100 A
willow 19 000 F
Material usage 26 500
Wood 16 500
Willow 10 0000
Labour rate 28 500 A
Labour efficiency 12 000 A
Variable overheads rate 6 000 F
Variable overheads efficiency 3 000 A
Fixed overheads expenditure 4 000
Fixed overheads volume 12 000 F
Actual profit 87 900

Reconciliation of budgeted and actual profit for a standard variable costing system
Budgeted net profit 88 000
Add sales volume variance 23 000
Standard profit 111 000
Add / (less): F /A variance 23 100
Sales price variance 36 000 F
Material price 8 900 F
Material usage 26 500 A
Labour rate variance 28 500 A
Labour efficiency variance 12 000 A
Variable overheads rate 6 000 F
Variable overheads efficiency 3 000 A
Fixed overheads expenditure 4 000 A
Actual profit 87 900

Question 11.1 Part A

Fey-Hay Limited manufacturers sells several products. Flush, an organic detoxifier, is one of the products
manufactured. You are provided with the following information regarding the standard cost per unit of
Flush:

R
Material Sen 3 kg @ R10 per kg 30
 Material Cam 9 kg @ R15 per kg 135
Labour 6 clock hours @ R12 per hour 72
Fixed overheads 58
Variable overheads 30
325

Fey- Hay Limited makes a 10% allowance for idle time.

Following is actual information pertaining to product Flush financial year ending 30 September 20X1:

 Number of units produced: 5 000

 Materials:
Purchased Sen: 20 000 kg for R209 000
Cam: 54 000 kg for R756 000
Issued Sen: 18 500 kg
Cam 45 500 kg
 Labour cost: 30 000 hours clocked at a cost of R294 000 while work hours amounted to 27 600.
Required:
a) Material price, mix and yield variance
b) Labour rate, idle time and efficiency variance
Part B
Fey-Hay also produces and sells rooibos tea made from blend of two direct raw materials: dried rooibos
leaves and dried lemon. The rooibos loose tea is packed in a box containing 100 grams of the rooibos-
lemon tea mixture.
The following details, relating to the rooibos-lemon loose tea, have been extracted from the budget
working papers for the financial year ending 30 September 20X1:

 Fer-Hay estimated that it will produce 72 000 boxes of rooibos-lemon loose tea and sell 70 800
boxes of rooibos-lemon loose tea evenly throughout the financial year.
 The standard sales price is R40 per box of rooibos-lemon tea.
 Direct raw materials required to produce the budgeted 72 000 boxes are:
Price per kg Total cost
Dried rooibos leaves R30 per kg R172 800
Dried lemon R200 per kg R288 000

 Actual information for the month of September 20X1 relating to the rooibos-lemon loose tea:
o 6 500 boxes were produced and 6 100 boxes were sold for a total sales value of R256
200.
o The direct raw materials were purchased and issued to production as follows:
Purchased Issued
Dried rooibos leaves 600 kg for R21 000 585 kg
Dried lemon 150 kg for R30 000 97.50 kg
Required:
A) Calculate the following variances for the rooibos-lemon loose rea for September 20X1:
 i) Sales price variance
ii) Material mix variance per direct raw material type and in total
iii) Material yield variance per direct raw material type and in total.
Question 11.2
GH manufactures and sells a single product. The company operates a standard absorption costing system
and absorbs overheads on the basis of direct labour hours.
The standard selling price and standard costs for one unit of the product are as follows:

Per unit (R)

Selling price 300
Direct material 15 metres @R9 per metre 135
Direct labour 5 hours @ R12 per hour 60
Variable production overheads 5 hour @ R6 per hour 30
Fixed production overheads 5 hours @ R3 per hour 15

The budgeted production and sales for February were 1 000 units. The fixed overheads absorption rate
has been calculated based on budgeted production for the month.
Actual results for February were as follows:

Production 1 400 units

Sales 1 200 units

Direct materials 22 000 metres @ R12 per metre

Direct labour 6 800 hours @ R15 per hour
Variable production overheads R33 000
Fixed production overheads R18 000

No materials inventories are held.

Required:
(a) Prepare a stamen that reconcile the budgeted gross profit with the actual gross profit for
February. Your statement should show the variances in as much detail as possible.
(b) The production director, when questioned about the variances, explained that, in an attempt to
improve the quality of the product, better-quality material was used and some of the semi-skilled
labour was replaced with skilled labour. The production director believed that the improvement in
the quality of the product would enale the company to increase the price of the product and would
also result in increased sales volumr. Discuss, using the variances calculated in part (a), the effect
on performance of the decisions taken by the production director.
(c) Explain why standard costing system may not be considered appropriate in a modern
manufacturing environment.
Question 11.3
A company manufactures and sells a single product. The compny operate a standard marginal costing
that enables the reporting of planning and operational variances.
The original standard contribution per unit of the product for October, which was used to establish the
budgeted contribution for the month, was as follows:

R
Selling price 60
Direct material 1,5 kg @ R10 per kg (15)
Direct labour 2 hours @ R15 per hour (30)
Contribution 15

Other information for October:

 Sales and production quantities:

Budgeted sales and production 40 000 units
Actual sales and production 42 000 units
 A change in the product specification was implemented at the start of October, which required
20% additional material for each unit. The standard cost shown was not revised to reflect this
change.
 Actual direct material purchased and used was 78 000kg at R9,90 per kg.
 The labour rate shown in the standard cost was overestimated. The correct standard labour rate
for the grade of labour required was R14,60 per hour/ The actual rate paid was R15,20 per hour
and actual hours worked were 86 000 hours.
 The actual selling price per unit was R62.
 There was no opening inventory of raw materials or finished goods.
Required:
(a) Prepare a statement for October that reconciles the budgeted contribution with the actual
contribution. Your statement should show the variances in as much detail as possible.
(b) Discuss the performance of the company for October. Your discussion should give one possible
reason for each of the operational variances calculated in part (a).
Question 11.5
Sencam Design manufactures exclusive furniture. Results have been disappointing in recent years,
and a new managing director, Nayshia Woods, was appointed to raise production volumes. After
initial assessment, she considered that budgets has been srt at levels which were easy for employees
to achive. She argued that employees would be better motivated by setting budgets which challenged
them more in terms of higher expected output.
Other than changing the overall budgeted output, Ms Woods has not yet altered any part of the
standard cost card which appears below:

R
Materials 25 kg @ R32 per kg 800
Labour 4 hours @ R80 per hour 320
Variable overheads 4 hours @ R40 per hour 160
Fixed overheads 4 hours @ R160 per hour 640
1 920
Selling price 2 200
Standard profit 280
 The budgeted output and sales for December 20X1 was 4 000 units. Overheads are absorbed on the
basis of labour hours, and the company uses an absorption costing system. There are no stocks at the
beginning of December 20X1. Stocks are valued at standard cost.
The actual results for December 20X1 are given in the table below.

R
Sales 3 200 7 200 000
Cost of sales 5 712 000
Material 80 000 kg @ R35 2 800 000
Labour 16 000 hours @ R70 1 120 000
Variable overheads 600 000
Fixed overheads 1 960 000
Total production cost 3 600 6 480 000
Closing stock 400 units @ R1 920 768 000
Actual profit 1 488 000

The average monthly production and sales for several years prior to December 20X1 had been 3 400
units, and budgets had previously been set at this level. Very few operating variances had been
historically generated by the standard costs used.
Ms Woods has made some significant changes to the operations of the company. However, the board
of directors thought that Ms Woods had been too ambitious in raising production standards. Ms Wood
also made the following changes:

 Changed suppliers of raw materials to improve quality

 Increased selling price
 Introduced unskilled labour
 Significantly reduced fixed overheads
The finance director suggested that an absorption costing system is misleading and the company should
consider adopting a marginal costing system at some stage in the future to guide decision making.
Required:
(a) Calculate all possible operating variances.
(b) Reconcile the budgeted and actual profit for the month for Sencam Designs.
(c) Reconcile the budgeted and actual profit for the month if the company were to change to the
marginal costing system.
Question 11.6 Part A
Baloo Ltd currently make use of a standard absorption costing system for planning and control purposes.
This costing system is now under review by the newly appointed cost accountant. She has started
preparing a statement that reconciles the budgeted and actual profit of Baloo Ltd based on the information
supplied below. She needs your help, however, to obtain the missing figures.
The following budget data relates to the production of product Baloo for June 20X1. The product gets
manufactured by mixing two types of raw materials, So and Da.

Cost
 Raw material input: So (0,4 kg @ R6 per kg 2,40
Raw material input: Da (0,6 kg @ R16 per kg 9,60
Raw material cost per kg input 12,00
Yield 96%
Raw material cost per kg output 12,50
Fixed manufacturing overheads per kg of output 0,40
Total standard cost per kg of output 12,90

Budgeted data for Product Baloo for the period is detailed in the following table:

Sales 72 000 kg
Production 70 000 kg
Baloo opening inventory ( valued at R25 800) 2 000 kg
Selling price per kg R22
Fixed production overheads R28 000

The fixed production overheads absorption rate is based on the budgeted number of kilograms produced.
All inventories are valued at a standard cost.
Actual data for Product Baloo for the period was as follows:
Sales 71 000 kg
Production 69 000 kg
Selling price per kg R23,00
Fixed production overheads incurred R27 800
Purchases cost per kg of raw material So R6,50
Purchases cost per kg of raw materials Da R15,80
Inputs of raw material So 29 900 kg
Input of raw material Da 40 100 kg

Required:
(a) Complete the statement that reconciles the budgeted and actual profit for product Baloo, showing
the missing variances as set out in the template.
Reconciliation statement of Baloo Ltd for June 20X1
R
Budgeted profit ?
Budgeted sales ?
Budgeted cost of sales:
Budgeted production cost ?
Opening inventory 25 800
Variances: F/A
Sales margin price variance ? ?
Sales margin volume variance ? ?
Material price variance 6 930 A
So 14 950 A
Da 8 020 F
Material mix variance 19 000 ?
 So ? ?
Da ? ?
Material yield variance ? ?
So ? ?
Da ? ?
Fixed overheads expenditure ? ?
variance
Fixed overheads volume ? ?
variance
Actual profit:
Actual sales revenue 1 633 000
So (194 350)
Da ?
Fixed overheads incurred (27 800)
Opening inventory ?