Question

D Limited manufactures and sells musical instruments, and uses a

standard cost system. The budget for production and sale of one
particular drum for April was 600 units at a selling price of £72 each.

When the sales director reviewed the results for April in the light of
the market conditions that had been experienced during the month,
she believed that D Limited should have sold 600 units of this drum
at a price of £82 each. The actual sales achieved were 600 units at
£86 per unit.

Calculate the following variances for this particular drum for April:

(a) Selling price planning variance

(b) Selling price operating variance 1

Answer
A - Original plan 600 x £72 = £43,200
B - Revised ex post plan 600 x £82 = £49,200
C - Actual results 600 x £86 = £51,600
Selling price planning variance is B – A = £6,000 F
Selling price operating variance is C – B = £2,400 F
(Total variance is C – A = £8,400 F to check)

2
Question
A company has a process in which the standard mix for producing 9
litres of output is as follows:
$
4.0 litres of D at $9 per litre 36·00
3·5 litres of E at $5 per litre 17·50
2·5 litres of F at $2 per litre 5·00
58·50
A standard loss of 10% of inputs is expected to occur. The actual
inputs for the latest period were:
$
4,300 litres of D at $9·00 per litre 38,700
3,600 litres of E at $5·50 per litre 19,800
2,100 litres of F at $2·20 per litre 4,620
63,120
3
Actual output for this period was 9,100 litres.

You are required to calculate

(a) The total materials mix variance

(b) The total materials yield variance

Answer 10:
Actual usage in standard proportions $
D= 4,000 litres at $9 per litre 36,000
E= 3,500 litres at $5 per litre 17,500
F= 2,500 litres at $2 per litre 5,000
10,000 58,500 (1)

Actual usage in actual proportions

D= 4,300 litres at $9 per litre 38,700
E= 3,600 litres at $5 per litre 18,000
F= 2,100 litres at $2 per litre 4,200
10,000 60,900 (2)
4
Mix variance is (1) – (2) = $2,400 Adverse
Yield variance
Standard cost of 1 litre is $58.50 / 9 = $6·50
Expected output is 10,000 x 90% = 9,000 litres
Actual output = 9,100 litres
Yield variance is (9,100 – 9,000) x $6.50 =$650 F

5
Question
(a) A company uses variance analysis to monitor the performance of
the team of workers which assembles Product M. Details of the
budgeted and actual performance of the team for last period were
as follows:
Budget Actual
Output of product M 600 units 680 units
Wage rate £30 per hour £32 per hour
Labour hours 900 hours 1,070 hours

It has now been established that the standard wage rate should have
been £31·20 per hour.
(i) Calculate the labour rate planning variance and calculate the
operational labour efficiency variance.
(ii) Explain the major benefit of analyzing variances into planning
and operational components. 6
(b) Briefly explain three limitations of standard costing in the
modern business environment.
(c) Briefly explain three factors that should be considered before
deciding to investigate a variance.
Answer to (a)
Difference in standard wage rate = £1·20 per hour
Planning variance (standard hours for actual output) x difference in
wage rate
680 x (900/600) x £1·20
1,020 x £1·20
£1,224 Adverse
Operational efficiency (standard hours for actual output – actual hours) x
Variance revised wage rate
(1,020 - 1,070) x £31·20
50 x £31·20
£1,560 Adverse 7
(ii) The major benefit of analysing the variances into planning and
operational components is that the revised standard should
provide a realistic standard against which to measure
performance. Any variances should then be a result of
operational management efficiencies and inefficiencies and not
faulty planning.

Answer to (b)
The main limitations of standard costing in the modern business
environment are as follows:

• The business environment in the past was more stable

whereas the modern business environment is more dynamic
and subject to change. As a result if a business environment
is continuously changing standard costing is not a suitable
method because standards cannot be established for a
reasonable period of time.
8
• The focus of the modern business environment is on
improving quality and customer care whereas the
environment in the past was focused on minimizing cost.

• The life cycle of products in the modern business

environment is shorter and therefore standards become
quickly out of date.

• The increase in automation in the modern business

environment has resulted in less emphasis on labour cost
variances.
Answer to (c)

The benefit of investigating a variance should never exceed the cost

of investigation. However this can be difficult to ascertain and
therefore a manager should decide to investigate a variance based on
the following:
9
 Size
Criteria will be laid down which state that variances which are of a
certain amount or percentage will be investigated. This is an
extremely simple method to apply but the cut off values can be
subjective.
Controllable / Uncontrollable
There is little point in investigating a variance if it is uncontrollable.
The cost in this situation would outweigh the benefits of
investigation since there would be no benefit obtained.
Interrelationships
An adverse variance in one part of the business may result in a
favourable variance elsewhere.
These interdependencies must be considered when deciding on
investigation. For example a favourable labour rate variance may
result in an adverse efficiency variance where less skilled workers
are employed, costing less, as a result the workers take longer to do
the job and an adverse efficiency variance arises.
10
Type of standard
If a company sets an ideal standard this will usually lead to adverse
variances. The manager will need to decide at what size of adverse
variance an investigation should take place on such variances.

11
Question
Dynamic manufacturers Ltd. produces a single product whose standard
cost is as shown below:
Standard
Unit Cost
Rs.
Raw materials (5 kg. @ Rs. 20 per Kg.) 100
Labor (4 hours @ Rs. 5) 20
Variable overheads (Rs. 3 per direct labor hour) 12
Fixed overheads (Rs. 6 per direct labor hour) 24
Standard Unit Cost 156

The standard selling price is Rs. 200 per unit and total marketing and
administration expenses (Rs. 10 per unit)Which are all basically fixed
amount to Rs. 500,000 p.a.
The Overheads are allocated on the basis of budgeted production of
50,000 units p.a.
During the year the company produced 40,000 units and the following
results were achieved:
 Rs. (000) Rs. (000)
Sales 84,000
Cost of sales:
Direct materials (208,000 Kg) 4,368
Labor (152,000 hours) 988
Variable overheads 456
Fixed overheads 1,250 7,062
Gross margin 1,338
Less: Selling and Admn. Exp. 450
Profit for the year 888

Required:
a. A detailed cost variance analysis.
b. Reconciliation of budgeted profit with realized profit.
c. Criticisms against the traditional variance analysis as a tool for
planning and control and suggestions advanced for its
improvement.
Answer 12):
a. A detailed cost variance analysis.

Sales Price Variance

Actual Units sold x (St. Sp – Act Sp)
40,000 x (200 – 210) = 400,000 (F)

Sales Volume Profit Variance

Actual Units sold – Budgeted Units sold ) x St. S Profit per Unit
(40,000 – 50,000) x 34 = 340,000 (A)
Sales Price = 300
Less: Total Cost = 166
Standard Profit = 34
Material Price Variance:
208,000 Kgs x (Rs. 20 –Rs. 21) = Rs. 208,000 (A)

Material usage Variance

Actual Material Usage – St. Usage) *St. price
(208,000 Kgs – 200,000 Kgs) x Rs. 20 –Rs. 160,000 (A)

15
Labor Rate Variance
Actual hours worked x (St. Rate – Actual Rate)
(152,000 hrs x (5 – 6.50) = Rs. 228,000 (A)

Labor Efficiency Variance

Actual labor hrs – St. labor hours ) x St. Rate
(152,000 hrs – 160,000 hrs) x Rs. 5 = 40,000 (F)

Variable Overhead Spending Variance

Actual V.O.H Rs. 456,000
Absorbed Volt (152,000 x 3) 456,000
Nil
Variable Overhead Efficiency Variance:
Absorbed V.O.H Rs. 456,000
Standard V.O.H at actual output 40,000 units x Rs. 12 Rs. 480,000
Variable O.H. Efficiency Variance (F) 24,000

Fixed Overhead Spending Variance

Actual F. O.H – Budgeted F.O.H
Rs. 1,250,000 – 1,200,000 = Rs. 50,000 (A)
50,000 * 4 * 6 = 1,200,000

Fixed overhead Efficiency – Productivity Variance:

(Absorbed F.OH – St. F. O.H at capacity attained)
(912,000 – 960,000) = Rs. 48,000 (F)
152,000 * 6 – 912,000
40,000 *24 = 960,000
 Fixed Factory Overhead Capacity Variance
Budgeted Fixed O.H – Absorbed Fixed O.H
(1,200,000 – 912,000 = Rs. 288,000 (A)

Selling and Administration Expenses Spending Variance

(Actual S/A Exp. – Budgeted S/A Exp.)
(450,000 – 500,000) = 50,000 (F)

Selling and Administration Expenses Efficiency Variance

(Budgeted S/A Exp. – Absorbed S/A Exp.)
(500,000 – 400,000) = 100,000 (A)
40,000 * 10 = 400,000
18
 Dynamic Manufactureres Limited
Operating Statement
Reconciliation of Budgeted Profit with Realized Profit
Rs.
Budgeted Profit (50,000 x 34) 1,700,000
Sales Price Variance 400,000 (F)
Sales Volume Variance 340,000 (A) 60,000 (F)
1,760,000
Cost Variance (F) (A)
Material Price Variance 208,000
Material Usage Variance 160,000
Labor Rate Variance 228,000
Labor Efficiency Variance 40,000
Variable O.H Spending Variance
Variable O.H Efficiency Variance 24,000
Fixed O.H Spending Variance 50,000
Fixed O.H Capacity Variance 288,000
Fixed O.H Efficiency Variance 48,000
Selling & Admn. Exp. Variance 50,000
Selling & Admn. Exp.
Efficiency Variance 100,000
162,000 1,034,000 872,000 (A)
Actual net Profit 888,000
c. Criticism Against Traditional Variance:

Traditional Variance Analysis fails to detect.

1. An implementation Deviation is a human or mechanical failure
to achieve a specific obtainable action.
2. A prediction deviation an error in predicting a parameter value
in the decision model.
3. A measurement deviation is an error in measuring the actual
cost of operating a process.
4. Trading – off certain variance.

Suggestions:
1. To Calculate planning and operating variance.
2. To investigate variance which justify on cost and benefit criteria.
3. To feedback and review.