CHAPTER 10 STANDARD COSTING AND VARIANCE ANALYSIS

SUGGESTED SOLUTIONS
SOLUTION TO MULTIPLE CHOICE QUESTIONS
10.1 (e) 10.6 (b)
10.2 (c) 10.7 (d)
10.3 (d) 10.8 (e)
10.4 (c) 10.9 (a)
10.5 (b) 10.10 (a)

END OF CHAPTER QUESTIONS

10.1
Standard costing enables a benchmark to be set against which actual costs, revenues and
volumes can be measured. This assists in management by exception, that is, it easily
identifies situations where actual results differ from what was expected. By identifying a
standard, budgets can be prepared and control is made easier because the variance from the
plan is easily determined.

10.2
A variance is a deviation in actual performance when measured against the standard
expected. While it is always anticipated that there will be some deviation from standard,
variance analysis permits a tolerance level to be established. This means, for example, that if
a 5% deviation (above or below standard) is considered to be acceptable, variances in excess
of the tolerance levels can be identified. There may be legitimate reasons for such deviations,
but it nevertheless brings it to the attention of the responsible manager, who will request an
explanation. If the variance is as a result of a situation which requires correction, then action
can be taken timeously.

10.3
The two most significant variables when setting standards for materials are the standard price
and the standard quantity of the materials used per item of production. In addition, attention
must be paid to the quality of the materials, as lower quality material may be less costly, but
larger quantities may be required. The three critical variables are therefore the price, the
quantity and the quality of the materials. Other factors which must be considered are the
availability and the supplier from which it will be sourced. There must be confidence that a
specific material will always be able to be sourced, so alternative and contingency plans must
be on hand. In the event of materials being sourced from outside the country, consideration
must be given to exchange rates and lead times for delivery.

10.4
Direct material standards are set based on price, quantity and quality of materials required.
Consideration must be given to wastage which is inevitable in the use of all materials. This
must be included the standard material requirements in order to ensure that the standard is
realistic under normal working conditions
Direct labour standards are set based on the wage which must be paid and the average time
required for production of each unit. The wage should be market related and must comply with
any minimum wage legislation. Consideration needs to be given to possible down time as a
result of machine malfunctions and other possible stoppages in the normal course of
production.

10.5
An ideal standard is based on perfect conditions and no consideration of any defects or
malfunctions. This is not practical in real life situations, so due consideration is given to these
issues when setting practical standards.

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 1

10.6
When actual sales units are identical to standard sales units, the only variance is the price
variance. This variance has an impact on the gross profit.
When actual sales units exceed the standard sales units, a volume variance is present. This
variance is the number of units in excess of the standard, multiplied by the gross profit of each
unit. It is a positive sales volume variance.

10.7
Direct costing treats overhead costs as an expense for the period under review. Stated
differently, all overhead costs are written off as an expense for the period, regardless of how
many units were produced or sold. No allocation of overheads is included in the cost of the
units, which is determined only on the basis of the direct (variable) costs.
As a result, when direct costing is used, the only overhead variance is the overhead spending
variance, that is the difference between budgeted overheads and actual overheads incurred
during the period.
When absorption (full) costing is used, a portion of the overheads is budgeted into the cost of
each unit of production, based on the budgeted production volume. When there is a difference
between budgeted and actual volume, it follows that overheads will either have been under
absorbed or over absorbed by the production output. The overhead volume variance (volume
of over/under production x standard overhead allocation) must be determined in order to
reconcile the Rand difference between budgeted and actual production cost.

10.8
All resources used can conveniently and intuitively be divided into the quantity of the resource
used and the price paid. In most cases there are different people responsible for each and
dividing the variance in this way enables the person responsible to offer the reasons for such
variances.

10.9
Whenever the actual volume of units produced or sold is above or below the budgeted volume
of units, it follows that many other cost and revenue items will also be affected. In fact, the
only item which should not be affected is fixed costs. In order to make the variances more
useful, it also follows that the budget against which actual performance is measured should be
"flexed" in order to see what the budget would have been, had it budgeted for the actual
production. Variances are then comparable and provide useful information.

10.10 STRUMMERS LTD

10.11
Labour cost 28 DESIGNER
1 CONTAINERS LTD
Material cost [100kg] 600 100
Labour per 10 units STANDARD COST OF GUITARS MANUFACTURED
Material Kg per 100 units
Ultra Extra Jars
Bottles PER 10
Pots UNITS
Jars
5 8
Ultra Extra
Material cost 36 24 15
R 220.00 Wood Direct labour rates per hour
Ultra Skilled
Extra labour Labour 140.00 224.00
15
Material 745.00 997.00
Wood 0.25 0.35 0
Unskilled labour 8
Varnish 0 0 0
Wood
Varnish Unskilled 55.00 77.00
Geeks 0 0 R 8.00
0 STANDARD COST OF460.00 CONTAINERS690.00MANUFACTURED
0 0 Geeks
0 Bottles Pots Jars 230.00
PER 230.00
1OO UNITS
R 230.00 Packing 0.00 0.00
Varnish and Geeks
Mixing 30 40 25 Bottles Jars Pots
Ultra Extra
Pressing 0
Standard Variable 0
Cost 0 885.00 2161,221.00 144
Wood 0 0 0 Material 90
Varnish 2 Finishing
3 0 0 0 0
Labour 1,370 1,166 955
Geeks 1 Packing1 0 10 12 10
0 0 0 Mixing 240 320 200
R 15.00 Skilled
Pressing 300 300 225
Bottles Pots Jars
Finishing 750 450 450
Mixing 0 0 0
© Packing SUGGESTED SOLUTIONS
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: 80 2 96 80
Pressing 20 20 15
Finishing 50 Standard
30 Variable
30 Cost 1,586 1,310 1,045
Packing 0 0 0
© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 3
10.12 MARATIME SURFING

Material cost 50 litre] R 1,540 50

Material Kg per 100 units
Body Long Surf
Material usage 12 16 10
Bought in Material 295 425 250
per hour
R 18.00 Unskilled
Body Long Surf
Shaping
Sanding 0.5 1 0.5
Colouring 0 0 0
Finishing 0.75 1 0.5
per hour
R 35.00 Skilled
Body Long Surf
Shaping 1 1.5 0.5
Sanding
Colouring 1.5 2 1
Finishing 0 0 0

STANDARD COST OF MARATIME SURFING

PER 1OO UNITS
Body Long Surf

Material 664.60 917.80 558.00

Wooden Base 295.00 425.00 250.00
Sheen 369.60 492.80 308.00

Labour 110.00 158.50 70.50

Shaping 35.00 52.50 17.50
Sanding 9.00 18.00 9.00
Colouring 52.50 70.00 35.00
Finishing 13.50 18.00 9.00
Standard Variable Cost 774.60 1,076.30 628.50

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 4

10.13 AIM HIGH LTD
(a) (b) & (c)

AIM HIGH LTD

unit sp/cost MASTER BUDGET
Manuf/Sell 100,000 12 100,000
material A 5,000 40 Sales 1,200,000
Material B Cost of Sales 800,000
Material C Materials 200,000
Labour A 8,000 50 Labour 400,000
Labour B Prime Cost 600,000
Labour C Overheads 200,000
Overhead 100,000 2
Net Profit 400,000
Profit/Sales 33.3%
Markup 50.0%

10.14 LUCID LTD

unit sp/cost LUCID LTD

Manuf/Sell 500,000 35 MASTER BUDGET
material A 600,000 18 500,000
Material B Sales 17,500,000
Material C Cost of Sales 15,960,000
Labour A 80,000 42 Materials 10,800,000
Labour B Labour 3,360,000
Labour C Prime Cost 14,160,000
Overhead 600,000 3 Overheads 1,800,000

Net Profit 1,540,000

Profit/Sales R 31.92
Markup 9.6%

10.15 AIM HIGH LTD [Flexible Budget]

AIM HIGH LTD

MASTER BUDGET
100,000 80,000 50,000
Sales 1,200,000 960,000 600,000
Cost of Sales 800,000 680,000 500,000
Materials 200,000 160,000 100,000
Labour 400,000 320,000 200,000
Prime Cost 600,000 480,000 300,000
Overheads 200,000 200,000 200,000
Net Profit 400,000 280,000 100,000
Cost per unit R 8.00 R 8.50 R 10.00
Profit/Sales 33.3% 29.2% 16.7%
Markup 50.0% 41.2% 20.0%

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 5

10.16 LUCID LTD [Flexible Budget]
(a) (b)

LUCID LTD
MASTER BUDGET
500,000 600,000 750,000
Sales 17,500,000 21,000,000 26,250,000
Cost of Sales 15,960,000 18,792,000 23,040,000
Materials 10,800,000 12,960,000 16,200,000
Labour 3,360,000 4,032,000 5,040,000
Prime Cost 14,160,000 16,992,000 21,240,000
Overheads 1,800,000 1,800,000 1,800,000
Net Profit 1,540,000 2,208,000 3,210,000
Cost per unit R 31.92 R 31.32 R 30.72
Profit/Sales 8.8% 10.5% 12.2%
Markup 9.6% 11.7% 13.9%

(c) The cost per unit declines as production increases, because the fixed costs are spread across
a grater number of units.

10.17 AIM HIGH LTD [Actual Production]

AIM HIGH LTD
VARANCE
VARANCE
MASTER FLEXIBLE ACTUAL FLEXIBLE
MASTER
BUDGET BUDGET RESULTS TO
TO ACTUAL
ACTUAL
100,000 75,000 75,000 0 -25,000
Sales 1,200,000 900,000 825,000 -75,000 -375,000
Cost of Sales 800,000 650,000 911,600 -261,600 -111,600
Materials 200,000 150,000 228,800 -78,800 -28,800
Labour 400,000 300,000 442,800 -142,800 -42,800
Prime Cost 600,000 450,000 671,600 -221,600 -71,600
Overheads 200,000 200,000 240,000 -40,000 -40,000
Net Profit 400,000 250,000 -86,600 -336,600 -486,600
Cost per unit R 8.00 R 8.67 R 12.15
Profit/Sales 33.3% 27.8% -10.5%
Markup 50.0% 38.5% -9.5%
CHECK: Variance Net profit -336,600 -486,600

STANDARD unit sp/cost

Manuf/Sell 100,000 12
material A 5,000 40
Labour A 8,000 50
Overhead 100,000 2
ACTUAL unit sp/cost COMMENTS ON VARIANCES
Manuf/Sell 75,000 11 Lower units, lower prices
material A 5,200 44 Higher units, higher costs
Labour A 8,200 54 More hours, higher cost per hour
Overhead 240,000 Fixed costs more than budgeted

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 6

10.18 LUCID LTD [Actual Production]
LUCID LIMITED

VARANCE VARANCE
MASTER FLEXIBLE ACTUAL
FLEXIBLE TO MASTER TO
BUDGET BUDGET RESULTS
ACTUAL ACTUAL

500,000 670,000 670,000 0 170,000

Sales 17,500,000 23,450,000 22,110,000 -1,340,000 4,610,000
Cost of Sales 15,960,000 20,774,400 17,655,000 3,119,400 -1,695,000
Materials 10,800,000 14,472,000 11,400,000 3,072,000 -600,000
Labour 3,360,000 4,502,400 4,320,000 182,400 -960,000
Prime Cost 14,160,000 18,974,400 15,720,000 3,254,400 -1,560,000
Overheads 1,800,000 1,800,000 1,935,000 -135,000 -135,000

Net Profit 1,540,000 2,675,600 4,455,000 1,779,400 2,915,000

Cost per unit R 31.92 R 31.01 R 26.35
Profit/Sales 8.8% 11.4% 20.1%
Markup 9.6% 12.9% 25.2%
CHECK: Variance Net profit 1,779,400 2,915,000

STANDARD unit sp/cost

Manuf/Sell 500,000 35
material A 600,000 18
Labour A 80,000 42
Overhead 600,000 3
ACTUAL unit flex sp/cost COMMENTS ON VARIANCES
Manuf/Sell 670,000 33 Considerably higher units, slightly lower price
material A 570,000 804,000 20 lower units than flexible, higher cost
Labour A 96,000 107,200 45 More hours, higher cost per hour
Overhead 1,935,000 Fixed costs more than budgeted

LUCID LIMITED
BUDGET VARIANCE REPORT
Budgeted Net profit 1,540,000
Sales Variance -204,400
Volume Variance 1,135,600
Price Variance -1,340,000
Material Variance 3,072,000
Volume Variance 4,212,000
Price Variance -1,140,000
Labour Variance 182,400
Volume Variance 470,400
Price Variance -288,000
Overhead Spending Variance -135,000
Actual Net Profit 4,455,000

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 7

10.19 THE TACK SHACK CC
(a) (b) &(c)
THE TACK SHOP CC
VARANCE
VARANCE
MASTER FLEXIBLE ACTUAL MASTER
FLEXIBLE
BUDGET BUDGET RESULTS TO
TO ACTUAL
ACTUAL
100 80 80 0 -20
Sales 5,000 4,000 4,240 240 -760
Cost of Sales 3,000 2,400 2,705 -305 295
Materials 2,000 1,600 1,960 -360 40
Labour 900 720 640 80 260
Prime Cost 2,900 2,320 2,600 -280 300
Overheads 100 80 105 -25 -5

Net Profit 2,000 1,600 1,535 -65 -465

Cost per unit R 30.00 R 30.00 R 33.81 -R 65
Profit per unit R 20.00 R 20.00 R 19.19 CHECK
Profit/Sales 40.0% 40.0% 36.2%
Markup 66.7% 66.7% 56.7%
CHECK: Variance Net profit -65 -465

(d)

BASIC VARIANCES
Master Budget Profit 2,000
Sales Volume -400
Sales Price 240
Cost -305
Actual Profit 1,535

(e)

THE TACK SHOP

BUDGET VARIANCE REPORT
Budgeted Net profit 2,000
Sales Variance -160
Volume Variance -400
Rate Variance 240
Material Variance -360
Usage Variance -640
Rate Variance 280
Labour Variance 80
Usage Variance 240
Rate Variance -160
Overhead Variance -25
Spending Variance -5
Qantity Variance -18
Actual Net Profit 1,535

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 8

10.20 RHINO DOORS (PTY) LTD
(a) (b) &(c)

RHINO DOORS CC
VARANCE
VARANCE
MASTER FLEXIBLE ACTUAL MASTER
FLEXIBLE
BUDGET BUDGET RESULTS TO
TO ACTUAL
ACTUAL
500 550 550 0 50
Sales 425,000 467,500 473,000 5,500 48,000
Cost of Sales 379,800 417,780 396,000 21,780 -16,200
Materials 54,000 59,400 55,000 4,400 -1,000
Labour 315,000 346,500 330,000 16,500 -15,000
Prime Cost 369,000 405,900 385,000 20,900 -16,000
Overheads 10,800 11,880 11,000 880 -200

Net Profit 45,200 49,720 77,000 27,280 31,800

Cost per unit R 759.60 R 759.60 R 720.00 R 27,280
Profit per unit R 90.40 R 90.40 R 140.00 CHECK
Profit/Sales 10.6% 10.6% 16.3%
Markup 11.9% 11.9% 19.4%
CHECK: Variance Net profit 27,280 31,800
(d)

BASIC VARIANCES
Master Budget Profit 45,200
Sales Volume 4,520
Sales Price 5500
Cost 21,780
Actual Profit 77,000

THE TACK SHOP

BUDGET VARIANCE REPORT
Budgeted Net profit 45,200
Sales Variance 10,020
Volume Variance 4,520
Rate Variance 5,500
Material Variance 4,400
Usage Variance -6600
Rate Variance 11000
Labour Variance 16,500
Usage Variance 0
Rate Variance 16,500
Overhead Variance 880
Spending Variance 200
Qantity Variance 880
Actual Net Profit 77,000

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 9

10.21 THE NATIONAL SAFE LTD
(a) (b) &(c)

NATIONAL SAFE LTD

VARANCE VARANCE
MASTER FLEXIBLE ACTUAL
FLEXIBLE MASTER
BUDGET BUDGET RESULTS
TO ACTUAL TO ACTUAL

1,200 1,400 1,400 0 200

Sales 14,400,000 16,800,000 17,360,000 560,000 2,960,000
Cost of Sales 11,760,000 13,720,000 13,605,600 114,400 -1,845,600
Materials 5,400,000 6,300,000 6,160,000 140,000 -760,000
Labour 4,800,000 5,600,000 5,745,600 -145,600 -945,600
Prime Cost 10,200,000 11,900,000 11,905,600 -5,600 -1,705,600
Overheads 1,560,000 1,820,000 1,700,000 120,000 -140,000

Net Profit 2,640,000 3,080,000 3,754,400 674,400 1,114,400

Cost per unit R 9,800.00 R 9,800.00 R 9,718.29 R 674,400
Profit per unit R 2,200.00 R 2,200.00 R 2,681.71 CHECK
Profit/Sales 18.3% 18.3% 21.6%
Markup 22.4% 22.4% 27.6%
CHECK: Variance Net profit 674,400 1,114,400
(d)
BASIC VARIANCES
Master Budget Profit 2,640,000
Sales Volume 440,000
Sales Price 560000
Cost 114,400
Actual Profit 3,754,400
(e)

NATIONAL SAFE LTD

BUDGET VARIANCE REPORT
Budgeted Net profit 2,640,000
Sales Variance 1,000,000
Volume Variance 440,000
Rate Variance 560,000
Material Variance 140,000
Usage Variance 525000
Rate Variance -385000
Labour Variance -145,600
Usage Variance 280,000
Rate Variance -425,600
Overhead Variance 120,000
Spending Variance -140,000
Qantity Variance 260000
Actual Net Profit 3,754,400

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 10