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- 10 Marks
Question
Odumasi Ltd has just introduced a new standard marginal costing system to assist in the planning and control of the production activities for the single product, which the company manufactures – ‘Tekie’. The system became operational on 1 March 2021.
The Management Accountant has consulted with the Senior Engineer and they have agreed on the following standard specifications to manufacture one unit of the product ‘Tekie’:
- Direct materials: 4 kg @ GH¢1.75 per kg
- Direct labour: 2 hours @ GH¢10 per hour
- Variable overhead: 2 hours @ GH¢8.25 per hour
According to the Marketing Director, Odumasi Ltd operates in an industry where the budgeted selling price is normally calculated to achieve a markup of 30% on cost. The budgeted level of production and sales activity has been agreed with both production managers and sales staff at 24,000 units per month.
The actual results for the month of March 2021 are as follows:
- Sales: 22,000 units yielding a total revenue of GH¢1,276,000.
- Production: 23,000 units.
- Direct Materials: 90,000 kg @ GH¢162,000.
- Direct labour: 48,000 hours @ GH¢576,000.
- Variable overhead: GH¢350,000.
Required:
Calculate the relevant variances for March 2021 under the headings of sales, materials, labour, and overheads.
Answer
Sales Variances:
- Sales Price Variance:
Did sell: 22,000 units for GH¢1,276,000
Expected to sell: 22,000 units @ GH¢56.55 = GH¢1,244,100
Variance: GH¢31,900 (Favorable) - Sales Volume Variance (based on contribution):
Did sell: 22,000 units @ GH¢13.05 = GH¢287,100
Expected to sell: 24,000 units @ GH¢13.05 = GH¢313,200
Variance: GH¢26,100 (Adverse)
Material Variances:
- Material Price Variance:
Did pay: 90,000 kg @ GH¢1.8 = GH¢162,000
Expected to pay: 90,000 kg @ GH¢1.75 = GH¢157,500
Variance: GH¢4,500 (Adverse) - Material Usage Variance:
Did use: 90,000 kg @ GH¢1.75 = GH¢157,500
Expected to use: 4 kg x 23,000 units = 92,000 kg @ GH¢1.75 = GH¢161,000
Variance: GH¢3,500 (Favorable)
Labour Variances:
- Labour Rate Variance:
Did pay: GH¢576,000
Expected to pay: 48,000 hours @ GH¢10 = GH¢480,000
Variance: GH¢96,000 (Adverse) - Labour Efficiency Variance:
Did take: 48,000 hours @ GH¢10 = GH¢480,000
Expected to take: 2 hours x 23,000 units = 46,000 hours @ GH¢10 = GH¢460,000
Variance: GH¢20,000 (Adverse)
Overhead Variances:
- Overhead Expenditure Variance:
Did cost: GH¢350,000
Expected to pay: 48,000 hours @ GH¢8.25 = GH¢396,000
Variance: GH¢46,000 (Favorable) - Overhead Efficiency Variance:
Did take: 48,000 hours @ GH¢8.25 = GH¢396,000
Expected to take: 2 hours x 23,000 units = 46,000 hours @ GH¢8.25 = GH¢379,500
Variance: GH¢16,500 (Adverse)
- Tags: Labour Variance, Material Variance, Overhead Variance, Sales Variance, Variance Analysis
- Level: Level 2
- Topic: Standard Costing and Variance Analysis
- Series: DEC 2023
- Uploader: Joseph