Question Tag: Labour Variance

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  • 10 Marks

MA – Dec 2023 – L2 – Q3a – Standard costing and variance analysis

This question involves calculating various cost and sales variances for Odumasi Ltd under a standard marginal costing system.

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.

Sales Variances:

  1. 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)
  2. 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:

  1. 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)
  2. 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:

  1. Labour Rate Variance:
    Did pay: GH¢576,000
    Expected to pay: 48,000 hours @ GH¢10 = GH¢480,000
    Variance: GH¢96,000 (Adverse)
  2. 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:

  1. 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)
  2. 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)
  • 12 Marks

MA – May 2018 – L2 – Q5a – Standard Cost Variances Analysis

Calculate standard cost variances including sales price, material price, and labour efficiency.

The following information relates to product Jupiter, produced by Bfield Ltd during January. This represents the information that remains after a fire in the premises destroyed most of the accounting records.

Variances GH¢
Selling price 50,000 A
Materials price 28,500 F
Materials usage 7,500 A
Labour rate 18,700 F
Labour efficiency 20,400 A

Actual data

  • Sales (25,000 units at GH¢10) = GH¢250,000
  • Materials costs (112,500 kg at GH¢1.20) = GH¢135,000
  • Labour costs (75,000 hrs. at GH¢1.9) = GH¢142,500

There was no opening or closing inventories.

Required:
Calculate the following:
i) Standard selling price per unit; (3 marks)
ii) Standard cost of material per kilogram; (3 marks)
iii) Standard kilograms of materials required per unit; (2 marks)
iv) Standard labour rate per hour; (2 marks)
v) Standard hours of labour required per unit. (2 marks)

i) Standard selling price per unit

  • Sales price variance:

25,000 units should have brought in (25,000 x S) =25,000

Variance=50,000A

Calculation: 25,000×S=GH¢300,000

S=GH¢300,000/25,000=GH¢12

ii) Standard cost of material per kilogram

Material price variance:

112,500 kg should have cost (112,500 x C)=112,500C

112,500 kg did cost=135,000

Variance=28,500F

Calculation:

112,500×Cost=GH¢163,500

C=GH¢163,500/112,500=GH¢1.453

iii) Standard kilograms of materials required per unit

  • Material usage variance:

25,000 units should have used (25,000 x Kg)=25,000Kg 

 25,000 units did use=112,500

Variance=7,500A

Calculation:

25,000×Kg=107,338

iv) Standard labour rate per hour

Labour rate variance:

75,000 hours should have cost (75,000 x C)=75,000C

Variance=18,700F

Calculation:

75,000×Cost=GH¢161,200

C=GH¢161,200/75,000=GH¢2.15

v) Standard Labour hours per unit of product

Labour efficiency variance:

25,000 units should have used (25,000 x Hrs)=25,000Hrs

25,000 units did use=75,000

Calculation:

Hrs.=65,512/25,000=2.62hrs

 

  • 15 Marks

MA – Nov 2016 – L2 – Q4a – Standard costing and variance analysis

Calculate various sales, material, labour, and overhead variances for Jungle Twist Ltd based on the provided data.

Jungle Twist Ltd manufactures quality blocks for the housing industry in Ghana. It operates a standard marginal costing system. The following standard costs, volume, and revenue data for the quarter ending 31 October 2015 are provided:

Standard cost card:

  • Selling price: GH¢18 per block
  • Costs:
    • Direct material P: 3 kg at GH¢2.60 per kg
    • Direct material Q: 2 kg at GH¢2.50 per kg
    • Direct labour: 2 hours at GH¢0.60 per hour
    • Variable overheads: GH¢0.50 per direct labour hour
  • Budgeted sales for the quarter: 62,500 blocks
  • Variable overheads are absorbed at the rate of GH¢0.50 per direct labour hour.
  • Fixed production overhead for the quarter is estimated to be GH¢78,500.

The following actual results were recorded for the quarter just ended 31 October 2015:

  • Production: 60,000 blocks
  • Sales: 58,000 blocks
  • Selling price: GH¢17.00 per block
  • Direct material P: 150,000 kg were bought and used at GH¢360,000
  • Direct material Q: 109,000 kg were bought and used at GH¢327,000
  • Direct labour: 108,000 hours were worked for at a cost of GH¢90,400
  • Variable overheads: GH¢82,000
  • Fixed production overheads: GH¢80,000

Required:
Calculate the following variances for the quarter just ended 30 September 2015:

i) Sales volume and sales price variances; (3 marks)

ii) Price and usage variances for each material; (3 marks)

iii) Mix and yield variance for each material; (3 marks)

iv) Labour rate, labour efficiency, and idle time variances; (3 marks)

v) Variable overheads expenditure and variable overheads efficiency variances. (3 marks)

i) Sales Volume and Sales Price Variances:

  • Sales Volume Variance:
    Budgeted sales units: 62,500
    Actual sales units: 58,000
    Variance in units: 4,500A
    Standard contribution margin: GH¢3
    Variance: GH¢13,500A
  • Sales Price Variance:
    58,000 units should have been sold for (58,000 x GH¢18) = GH¢1,044,000
    But were sold for (58,000 x GH¢17) = GH¢986,000
    Variance: GH¢58,000A

ii) Price and Usage Variances for Each Material:

  • Material Price Variances:
    • Material P:
      Actual purchases should have cost (150,000 x GH¢2.60) = GH¢390,000
      But did cost GH¢360,000
      Variance: GH¢30,000F
    • Material Q:
      Actual purchases should have cost (109,000 x GH¢2.50) = GH¢272,500
      But did cost GH¢327,000
      Variance: GH¢54,500A
  • Material Usage Variances:
    • Material P:
      60,000 units should have used (60,000 x 3kg) = 180,000 kg
      But did cost 150,000 kg
      Variance: 30,000 kg F
      Standard price: GH¢2.60
      Variance: GH¢78,000F
    • Material Q:
      60,000 units should have used (60,000 x 2kg) = 120,000 kg
      But did cost 109,000 kg
      Variance: 11,000 kg F
      Standard price: GH¢2.50
      Variance: GH¢27,500F

iii) Mix and Yield Variance for Each Material:

  • Material Mix Variance:
Material Actual Materials in Standard Mix (kg) Actual Materials in Actual Mix (kg) Difference (kg) Standard Price (GH¢) Variance (GH¢)
P 155,400 150,000 5,400 F 2.60 14,040 F
Q 103,600 109,000 5,400 A 2.50 13,500 A
Total Variance: 540 F 540 F
  • Material Yield Variance:
Material Expected Output (units) Actual Output (units) Difference (units) Standard Yield Price (GH¢) Variance (GH¢)
P 30,000 36,000 6,000 F 2.56 15,360 F
Q 21,800 24,000 2,200 A 2.56 5,632 F
Total Variance: 20,992 F

iv) Labour Rate, Labour Efficiency, and Idle Time Variances:

  • Labour Rate Variance:
    108,000 hours should have cost (108,000 x GH¢0.60) = GH¢64,800
    But did cost GH¢90,400
    Variance: GH¢25,600A
  • Labour Efficiency Variance:
    60,000 units should have used (60,000 x 2hrs) = 120,000 hours
    But did cost 108,000 hours
    Variance: 12,000 hours F
    Standard price: GH¢0.60
    Variance: GH¢7,200F

v) Variable Overheads Expenditure and Efficiency Variances:

  • Variable Overheads Expenditure Variance:
    108,000 hours should have cost (108,000 x GH¢0.50) = GH¢54,000
    But did cost GH¢82,000
    Variance: GH¢28,000A
  • Variable Overheads Efficiency Variance:
    60,000 units should have used (60,000 x 2hrs) = 120,000 hours
    But did cost 108,000 hours
    Variance: 12,000 hours F
    Standard price: GH¢0.50
    Variance: GH¢6,000F

(Total: 15 marks)

  • 20 Marks

IMAC – DEC 2022 – L1 – Q3 – Scope of Management Accounting | Standard Costing and Variance Analysis

Explanation of responsibility accounting classifications, reasons for full costing, and calculation of material, labour, and overhead variances.

a) Responsibility Accounting is a system of accounting in which costs are identified with persons who are primarily responsible for making decisions about the costs in question. Responsibility Accounting classifies cost under two main headings.

Required:
Explain the TWO (2) classifications of cost under Responsibility Accounting. (2 marks)

b) Full costing is an accounting method used to determine the complete end-to-end cost of producing products or services. Accountants use the term full cost to mean more than a product’s manufacturing or production costs (including fixed manufacturing overhead).

Required:
Explain FOUR (4) reasons full cost of a product or service may be calculated. (8 marks)

c) Afram Ltd has just introduced a standard marginal costing system to assist in the planning and control of the production activities for its single product, Amino. The system became operational on 1 January 2022. The Functional Director responsible for cost and management accounting had a discussion with the Production Manager, and both have agreed on the following standard cost information to manufacture one unit of product, Amino.

Budgeted cost:

  • Direct materials: 4kg @ GH¢1.75 per kg
  • Direct labour: 2 hours @ GH¢10 per hour
  • Variable overhead: 2 hours @ GH¢8.25 per hour.

Actual Results:
The actual results for January 2022 are as follows:

  • Sales: 22,000 units yielding a total revenue of GH¢1,276,000
  • Production: 23,000 units
  • Direct Materials: 90,000 kgs at a cost of GH¢162,000
  • Direct labour: 48,000 hours at a cost of GH¢576,000
  • Variable overhead: GH¢350,000

The budgeted level of production and sales activity has been agreed with both production managers and sales staff at 24,000 units per month.

Required:
Calculate the following variances:
i) Direct Material Price
ii) Direct Material Usage
iii) Direct Labour Rate
iv) Direct Labour Efficiency
v) Variable Overhead Efficiency (10 marks)

a) Cost classification under Responsibility Accounting:

  • Controllable cost: Cost that the responsibility head can influence the size of.
  • Uncontrollable cost: Cost that the responsibility head cannot influence the size of.
    (2 marks)

b) Reasons for full cost:

  • Overheads are expenses that are incurred in the production of goods, and excluding them will understate the cost of production.
  • Full cost will be needed in inventory valuation for external reporting purposes.
  • It provides details of cost for effective pricing.
  • Calculating over and under absorbed overheads will help in cost control.
  • By comparing the full cost with the selling price, management will be in a position to know which products are sold at a loss.
    (Any 4 points @ 2 marks each = 8 marks)

c) Calculation of variances:

i) Material price variance:
AQ x (SP – AP)
90,000 x (GH¢1.75 – GH¢1.80) = GH¢4,500A

ii) Material usage variance:
SP x (SQ – AQ)
GH¢1.75 x (92,000 kg – 90,000 kg) = GH¢3,500F
SQ = 4kg x 23,000 units = 92,000 kg

iii) Labour rate variance:
AH x (SR – AR)
48,000 hrs x (GH¢10 – GH¢12) = GH¢96,000A

iv) Labour efficiency variance:
SR x (SH – AH)
GH¢10 x (46,000 hrs – 48,000 hrs) = GH¢20,000A
AR = GH¢576,000 / 48,000 hrs = GH¢12

v) Variable overhead efficiency variance:
SR x (SH – AH)
GH¢8.25 x (46,000 hrs – 48,000 hrs) = GH¢16,500A
SH = 2 hours x 23,000 units = 46,000 hrs
(2 marks for each variance = 10 marks)

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