Question Tag: Profit reconciliation

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  • 15 Marks

MA – May 2017 – L2 – Q5 – Standard costing and variance analysis

Prepare a statement reconciling budgeted profit with actual profit, showing individual variances in detail.

You are the Management Accountant of ABS Limited. The following computer printout shows details relating to June 2017.

Description Actual Budget
Sales volume (units) 4,900 5,000
Selling price per unit (GH¢) 11.00 10.00
Production volume (units) 5,400 5,000
Direct materials:
– Quantity (kg) 10,600 10,000
– Price per kg (GH¢) 0.60 0.50
Direct labour:
– Hours per unit 0.55 0.50
– Rate per hour (GH¢) 3.80 4.00
Fixed overhead:
– Production (GH¢) 10,300 10,000
– Administration (GH¢) 3,100 3,000

ABS Limited uses a standard absorption costing system. There was no opening or closing work-in-progress.

Required:

Prepare a statement that reconciles the budgeted profit with the actual profit for June 2017, showing individual variances in detail. (15 marks)

ABS Limited: Budgeted vs. Actual Profit Reconciliation Statement for June 2017

Description Amount (GH¢)
Budgeted Profit (5,000 units @ GH¢5) 25,000
Sales Volume Variance (100 units × GH¢5) (500)
Budgeted Profit on Actual Sales (4,900 units @ GH¢5) 24,500

Variances:

  1. Sales Price Variance:
    • Actual price per unit = GH¢11.00
    • Budgeted price per unit = GH¢10.00
    • Variance = (11.00 – 10.00) × 4,900 units = GH¢4,900 (Favorable)
  2. Direct Material Price Variance:
    • Actual price per kg = GH¢0.60
    • Budgeted price per kg = GH¢0.50
    • Variance = (0.50 – 0.60) × 10,600 kg = GH¢1,060 (Adverse)
  3. Direct Material Usage Variance:
    • Actual quantity = 10,600 kg
    • Budgeted quantity = 10,000 kg
    • Variance = (10,000 – 10,600) × GH¢0.50 = GH¢300 (Adverse)
  4. Direct Labour Rate Variance:
    • Actual rate per hour = GH¢3.80
    • Budgeted rate per hour = GH¢4.00
    • Variance = (4.00 – 3.80) × 2,695 hours = GH¢539 (Favorable)
  5. Direct Labour Efficiency Variance:
    • Actual hours per unit = 0.55 hours
    • Budgeted hours per unit = 0.50 hours
    • Variance = (0.50 – 0.55) × 4,900 units × GH¢4.00 = GH¢980 (Adverse)
  6. Fixed Overhead Expenditure Variance:
    • Actual fixed production overhead = GH¢10,300
    • Budgeted fixed production overhead = GH¢10,000
    • Variance = GH¢300 (Adverse)
  7. Fixed Overhead Volume Variance:
    • Actual production volume = 5,400 units
    • Budgeted production volume = 5,000 units
    • Variance = (5,400 – 5,000) × GH¢2.00 = GH¢800 (Favorable)
  8. Fixed Administration Overhead Expenditure Variance:
    • Actual administration overhead = GH¢3,100
    • Budgeted administration overhead = GH¢3,000
    • Variance = GH¢100 (Adverse)

Total Variances:

  • Favorable Variances Total: GH¢6,239
  • Adverse Variances Total: GH¢2,740
  • Net Variance: GH¢3,499 (Favorable)

Actual Profit:

  • Budgeted Profit on Actual Sales: GH¢24,500
  • Add: Net Favorable Variance: GH¢3,499
  • Actual Profit: GH¢27,999

(15 marks)

  • 9 Marks

MA – Nov 2015 – L2 – Q1d – Standard costing and variance analysis

Calculate sales, material, wage, overhead variances, and reconcile budgeted profit to actual profit.

You have been asked as a cost accountant to reconcile the Budgeted profit to the actual profit using the variance report generated by the management accountant.

i. Calculate the sales variances (2 marks)
ii. The total material variance (1 mark)
iii. The total wage variances (1 mark)
iv. Total manufacturing overhead variances (1 mark)
v. Reconciliation of Budget profit to the actual profit (4 marks)

(Total = 9 marks)

i) Sales Price Variance:
Sales price variance = (Actual contribution – Standard contribution) x Actual quantity
= (¢55 – ¢50) x 9000 = ¢45,000F

Sales Volume Variance:
(Actual volume – Standard volume) x Standard contribution
= (9000 – 10,000) x 50 = 50,000A

Total Sales Variance:
Sales margin price variance = ¢45,000F
Sales margin volume variance = ¢50,000A
Total sales variance = ¢5,000A

ii) Total Material Variance:
Total material variance = Material price variance + Material usage variance
= 22,250A + 66,250A = 88,500A

iii) Total Wage Variance:
Total wage variance = Wage rate variance + Labour efficiency variance
= ¢42,750A + ¢33,750A = ¢76,500A

iv) Total Manufacturing Overhead Variance:
Total manufacturing overhead variance = Fixed overhead expenditure variance + Variable overhead expenditure variance + Variable overhead efficiency variance
= 10,000F + 12,500F + 7,500A = 15,000F

v) Reconciliation of Budgeted Profit to Actual Profit:

Item GHS
Budgeted net profit 200,000
Sales variances:
Sales margin price 45,000F
Sales margin volume 50,000A
Total Sales Variance 5,000A
Direct cost variance:
Material price 66,250A
Material usage 22,250A
Total material variance 88,500A
Total wage variance:
Wage rate variance 42,750A
Labour efficiency 33,750A
Total wage variance 76,500A
Total overhead variance:
Fixed overhead expenditure variance 10,000F
Variable overhead expenditure variance 12,500F
Variable overhead efficiency variance 7,500A
Total overhead variance 15,000F
Total Variance 155,000A
Profit 45,000

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