- 15 Marks
Question
Emefa Ltd bakes cakes by mixing three ingredients, namely Flour, Sugar, and Butter, in the standard proportions of 5:3:2, respectively. However, the production process does not always mix the ingredients in these proportions, but the cake can be sold if the mixture is within certain limits.
The new production manager (a celebrity chef) has argued that the business should use only organic ingredients in its cake production. Organic ingredients are more expensive but should produce a product with an improved flavor and give health benefits for the customers. It was hoped that this would stimulate demand and enable an immediate price increase for the cakes.
The standard prices for the ingredients are:
- Flour: GH¢ 2.50 per kilo
- Sugar: GH¢ 3.00 per kilo
- Butter: GH¢ 2.00 per kilo
There is a 5% normal loss in the production process.
The budget for production and sales in the period was 50,000 cakes. Actual production and sale of cake mixture was 228,000 kg. During the period, the inputs were as follows:
| Ingredient | Kg | GH¢ |
|---|---|---|
| Flour | 96,000 | 249,600 |
| Sugar | 72,000 | 216,000 |
| Butter | 50,000 | 105,000 |
Required:
a) Calculate the following variances:
i) Material Mix Variance (3 marks)
ii) Material Yield Variance (3 marks)
iii) Material Usage Variance (3 marks)
b) Differentiate between planning variances and operational variances. (2 marks)
c) Explain why separating variances into their planning and operational components provides better information for planning and control purposes. (4 marks)
Answer
a)
i) Material Mix Variance
Flour (96,000 – (5/10 x 218000)@GH¢2.5 = 32,500 F
Sugar (72,000 – (3/10 x218,000)@GH¢ 3.0 = 19,800 A
Butter (50,000 – (2/10 X 218,000) @GH¢2.0 = 12,800 A
Total Material Mix Variance 100A
ii) Material Yield Variance
Flour (109,000 – 120,000) @GH¢2.5 = 27,500F
Sugar (65,400 – 72,000) @GH¢3.0 = 19,800F
Butter (43,600 – 48,000) @ GH¢2.0 = 8,800F
Total Material Yield 56,100F
iii) Material Usage variance = Mixed Variance + Yield Variance
Flour = 32,500 F + 27,500F = 60,0000 F
Sugar =19,800A + 19,800F = –
Butter = 12,800 A +8,800F = 4,000 A
Total 100A + 56,100F 56,000 F
Alternatively, it can be calculated as:
| Ingredient | Actual Usage (Kg) | Standard Usage (Kg) | Standard Cost (GH¢) | Usage Variance (GH¢) |
|---|---|---|---|---|
| Flour | 96,000 | 120,000 | 2.50 | 60,000 F |
| Sugar | 72,000 | 72,000 | 3.00 | – |
| Butter | 50,000 | 48,000 | 2.00 | 4,000 A |
| Total Usage Variance | 56,000 F |
(3 marks)
b) Planning Variances vs. Operational Variances:
- Planning Variance: A planning variance, also known as a revision variance, compares an original standard with a revised standard that would have been used if the planner had known what was going to happen. It reflects the difference between the budgeted amounts and the amounts that should have been budgeted given the actual circumstances.
- Operational Variance: An operational variance compares actual results with the revised standard. It focuses on the efficiency of management in controlling costs and operations under the conditions that actually prevailed during the period.
(2 marks)
c) Importance of Separating Variances into Planning and Operational Components:
- Identifies Control Issues: Separating variances into planning and operational components allows management to distinguish between variances caused by factors outside their control (planning variances) and those that are within their control (operational variances).
- Improved Decision Making: It enables management to focus on the controllable aspects of the business, leading to better decision-making and more effective resource allocation.
- Motivates Managers: By focusing on operational variances, managers are more likely to be motivated to improve efficiency, knowing that they are not being judged on factors beyond their control.
- Improves Planning Processes: Planning variances can highlight weaknesses in the budgeting process, leading to improvements in future planning and forecasting.
(4 marks)
- Tags: Material variances, mix variance, Usage Variance, Variance Analysis, yield variance
- Level: Level 2
- Topic: Standard Costing and Variance Analysis
- Series: MAY 2019
- Uploader: Joseph