Question Tag: Labour Rate Variance

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  • 20 Marks

IMAC – JULY 2023 – L1 – Q3 – Standard Costing and Variance Analysis

Discuss differences between private and public sector entities and calculate standard costing variances for materials, labour, and overheads.

a) Public Sector in Ghana includes the Metropolitan, Municipal and District Assemblies
(MMDA’s) and the Ministries, Departments and Agencies (MDA’s). The private sector
dominates in terms of numbers and are significantly different in operations from the public
sector.
Required:
In reference to the above statement, explain FOUR (4) key differences between a private
sector entity and a public sector entity. (10 marks)
b) Konka Ltd produces a product – “the telescope”.
Actual results for the period were:
Production: 430 units made
Materials: 1,075 kg were used.
1,200 kg of materials were purchased at a cost of GH¢17,700
Direct labour: 1,700 hours were worked at a cost of GH¢14,637
Variable production overheads expenditure: GH¢3,870.

The standard cost card for the product is as follows:
GH¢
Direct material 2 kg x GH¢15 30
Direct labour 4hrs x GH¢8.50 34
Variable overhead 4hrs x GH¢2.00 8
The cost card is based on production and sales of 450 units in each period.
The company values its inventories at standard cost.
Required:
Calculate the following variances for Konka Ltd:
i) Material price variance
ii) Material usage variance
iii) Labour rate variance
iv) Labour efficiency variance
v) Variable overhead expenditure variance
(10 marks)

a)
Key Differences between a Private Sector Company and a Public Sector Organization:

Aspect Private Sector (Limited Company) Public Sector Organization
Ownership Shareholders The people (through the government)
Management The owners or managers appointed by owners Government appointees
Objectives To make a profit To provide a service
Funding From shareholders or borrowing from financial institutions By grants from the government
(10 marks)

b)
i) Materials Price Variance
1,200 kg of materials should cost (1,200 kg × GH¢15) = GH¢18,000
Actual cost = GH¢17,700
Materials price variance = GH¢300 Favorable (F)
(2 marks)

ii) Materials Usage Variance
430 units of output should use (430 units × 2 kg) = 860 kg
Actual usage = 1,075 kg
Materials usage variance in kg = 215 kg Adverse (A)
Standard price per kg of materials = GH¢15
Materials usage variance = 215 kg × GH¢15 = GH¢3,225 Adverse (A)
(2 marks)

iii) Labour Rate Variance
1,700 labour hours should cost (1,700 hrs × GH¢8.50) = GH¢14,450
Actual cost = GH¢14,637
Labour rate variance = GH¢187 Adverse (A)
(2 marks)

iv) Labour Efficiency Variance
430 units of output should take (430 units × 4 hrs) = 1,720 hrs
Actual hours worked = 1,700 hrs
Labour efficiency variance in hours = 20 hrs Favorable (F)
Standard rate per labour hour = GH¢8.50
Labour efficiency variance = 20 hrs × GH¢8.50 = GH¢170 Favorable (F)
(2 marks)

v) Variable Overhead Expenditure Variance
1,700 hours should cost (1,700 hrs × GH¢2) = GH¢3,400
Actual cost = GH¢3,870
Variable overhead expenditure variance = GH¢470 Adverse (A)
(2 marks)

  • 20 Marks

IMAC – APRIL 2022 – L1 – Q5 – Standard Costing and Variance Analysis

Computation of variances for a product, derivation of a cost prediction formula using the high-low method, and explanation of seasonal variation models.

a) Magawa Ltd operates a standard variables costing system and manufactures a single product called “Magic Touch”.

The following quantities, costs and prices data have been extracted for the period just ended March 31, 2021 in respect of Magic Touch:

Standard cost card:

GH¢
Direct materials 15g at GH¢10/g = 150
Direct labour 8 hours at GH¢6/hour = 48
Variable overheads 8 hours at GH¢4/hour = 32
Standard contribution 25
Standard selling price per unit 255

Budgeted production units: 1,500

Actual results for the period ended March 31, 2021 were as follows:
Production and sales units 1,650
Selling price per unit GH¢278
Direct materials used 23,760g
Direct materials costs GH¢308,880
Direct labour hours worked 10,725
Direct labour costs GH¢85,800
Variable overheads GH¢68,000

Required: i) Compute the following variances for Magawa Ltd for the period ended March 31, 2021:

  1. Direct materials price variance. (1 mark)
  2. Direct materials usage variance. (1 mark)
  3. Direct labour rate variance. (1 mark)
  4. State ONE (1) possible reason for the material price variance calculated. (1 mark)
  5. State ONE (1) possible reason for the labour rate variance calculated. (1 mark)

b) The Valuation Department of a large firm of surveyors wishes to develop a method of predicting its total costs in a period. The following past costs and activity levels have been recorded.

Period Number of Valuations (V) Total Cost (TC) GH¢
1 420 82,200
2 515 90,275
3 425 82,900
4 500 90,000

Required: i) Derive a formula for the total cost model for a period. (4 marks) ii) Evaluate the usefulness of the high-low method. (4 marks)

c) The trend line on its own is not sufficient to make forecasts for the future. Estimates of the size of the ‘seasonal’ variation for each of the different seasons are needed. The seasonal variation is then used to adjust a forecast trend.

Required: Explain TWO (2) models used to estimate seasonal variations. (7 marks)

  1. Possible reason for the material price variance: Increase in raw material prices due to inflation or shortage of materials. (1 mark)
  2. Possible reason for the labour rate variance: Increase in wage rates due to higher demand for skilled labour or overtime payments. (1 mark)

b) i) Total cost model using high-low method:

Period V TC (GH¢)
2 515 90,275
1 420 82,200

Change in TC = 90,275 – 82,200 = 8,075 Change in V = 515 – 420 = 95 Variable cost per valuation = 8,075 / 95 = 85

Fixed cost = TC – (VC × V) Using Period 2: Fixed cost = 90,275 – (85 × 515) = 46,000

Total cost model: TC = 46,000 + 85V (4 marks)

ii) Usefulness of the high-low method:

  • Simple and Easy: The high-low method is straightforward and easy to apply for estimating fixed and variable costs.
  • Limited Data Requirement: Requires only two data points, making it useful when limited data is available.
  • Quick Estimates: Provides quick estimates of cost behavior which can be useful for preliminary analysis.
  • Potential Issues: However, it ignores data between the high and low points, potentially leading to inaccuracies if those points are not representative of normal operations. Historical data used may not reflect current conditions. (4 marks)

c) Models used to estimate seasonal variations:

  1. Additive Model:
    • Assumes that seasonal variations above and below the trend line in each cycle add up to zero.
    • Steps:
      • Calculate the difference between the moving average value and the actual historical figure for each time period.
      • Group these seasonal variations into different seasons (e.g., days of the week, months, or quarters).
      • Calculate the average of these seasonal variations for each season.
      • If the total seasonal variations for the cycle do not add up to zero, spread the difference evenly across each season.
      • The adjusted figure is the seasonal variation. (3.5 marks)
  2. Proportional (Multiplicative) Model:
    • Expresses the actual value in each season as a proportion of the trend line value.
    • Steps:
      • Calculate seasonal variations for each time period by dividing the actual data by the corresponding moving average or trend line value.
      • Sum of the proportions for each time period must add up to 1 (or the sum of proportions for quarterly data must sum to 4).
      • If the sum does not match, spread the difference evenly over each quarter to adjust the proportions. (3.5 marks)

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