Chapter 9 Standard costing, flexible budgeting and variance
Transcript Of Chapter 9 Standard costing, flexible budgeting and variance
Chapter 9
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Standard costing, flexible budgeting and variance analysis
Questions
1. Priory Pegamoid Limited produces a range of parts for industrial weaving machines. The budget sales and prime costs for April 20X1 for component L63A are as follows:
Sales: 600 units × £25 per unit
£ 15 000
Costs Direct materials: 600 units × (1kg × £6) Direct labour: 600 units × (1.2 hours × £8)
3 600 5 760
Prime cost
9 360
You are required to flex the budget for a sales and production level of 575 units.
2. Quayle Products plc manufactures waste disposal units. Its sales and costs budget for November 20X2 is as follows:
Sales: 3000 units × £72
£ 216 000
Costs Direct materials (metal) 3000 × (1kg × £14) Direct materials (plastic) 3000 × (£0.5kg × £7) Direct labour: 3000 × (0.75 hours × £8)
(42 000) (10 500) (18 000)
Production overhead
(86 500)
59 000
Other overheads
(31 000)
Net profit
28 000
The company does not absorb production overheads using an overhead absorption rate. It may be assumed that all of its overheads are fixed in nature. The company’s actual results for the month are as follows:
£
Sales: 2950 units × £73
215 350
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Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Costs Direct materials (metal) 2950 × (0.9kg × £13.80) Direct materials (plastic) 2950 × (£0.5kg × £7.20) Direct labour: 2950 × (0.7 hours × £8.20)
(36 639) (10 620) (16 933)
Production overhead
(84 250)
66 908
Other overheads
(32 250)
Net profit
34 658
You are required to: (a) calculate:
(i) sales profit volume variance (ii) sales price variance (iii) materials price variance (for both metal and plastic) (iv) materials quantity variance (for both metal and plastic) (v) direct labour rate variance (vi) direct labour efficiency variance (vii) overheads variances (b) prepare a standard cost operating statement (c) suggest reasons for any price variances you have calculated.
3. Robertson Rix Limited is a manufacturing company. In January 20X6 it budgeted for 1500 units of production, each of which uses 2.25 hours of machine time. Production overhead absorption rates had been budgeted as follows for the financial year:
Variable production overhead
£6 per machine hour
Fixed production overhead
£7.80 per machine hour
The actual level of production in the month was 1520 units. The actual expenditure on variable production overhead in the month was £21 360. The actual expenditure on fixed production overhead in the month was £26 201.
You are required to calculate:
(a) the variable production overhead variance
(b) the fixed production overhead variance
2
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
4. Selly Watkins plc makes bathroom fittings. The directors have monthly board meetings at which, amongst other things, they discuss the most recent standard cost operating statement. The statement for April 20X3 reads as follows:
Total
£
Original budgeted net profit
216 760
Sales profit volume variance
5 866
Flexed budget net profit
222 616
Other variances
Sales price variance Direct materials price variance Direct materials quantity variance Direct labour rate variance Direct labour efficiency variance Variable overhead variance Fixed overhead variance Total Actual net profit
Favourable £
8 760
(Adverse) £ (2 689)
(9 989)
—
—
660
(8 828)
9 420
(9 771) (31 277)
(21 857) 200 769
The directors are concerned that the net adverse variance for the month is more than 10% of the original budgeted net profit. They call in the management accountant for some explanations. He comes up with the following points:
1. The sales team decided to raise prices in the middle of April and we haven’t yet adjusted the standard prices to reflect this increase.
3
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
2. We obtained a really good quantity discount on materials from a new supplier.
3. The materials quantity variance is due to the fact that the materials we’ve bought in recently have been of higher quality than we originally anticipated.
4. The labour efficiency variance probably arises because the new production line staff we took on in April are really very efficient workers.
5. The overhead variances are unfortunate, but the problem really is that we underestimated the level of both fixed and variable overheads when we were setting the original budget.
Three of these explanations are quite plausible; two are not. Required: identify which explanations for the variances that have occurred in April 20X3 are plausible and which are implausible.
4
Answers
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
1. Priory Pegamoid Limited: flexed budget for 575 units
Sales: 575 units × £25 per unit Costs Direct materials: 575 units × (1kg × £6) Direct labour: 575 units × (1.2 hours × £8) Prime cost
£ 14 375
3 450 5 520 8 970
2. Quayle Products plc Flexed budget for 2950 units
Sales: 2950 units × £72 Costs Direct materials (metal) 2950 × (1kg × £14) Direct materials (plastic) 2950 × (£0.5kg × £7) Direct labour: 2950 × (0.75 hours × £8) Production overhead
Other overheads Net profit
£ 212 400
(41 300) (10 325) (17 700) (86 500)
56 575 (31 000)
25 575
Setting the original budget, flexed budget and actual results side by side:
Sales Costs Direct material – metal Direct material – plastic
Original budget £ 216 000
(42 000) (10 500)
Flexed budget £ 212 400
(41 300) (10 325)
Actual
£ 215 350
(36 639) (10 620)
5
Direct labour Production overhead
Other overheads
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(18 000) (17 700) (16 933)
(86 500) (86 500) (84 250)
59 000
56 575
66 908
(31 000) (31 000) (32 250)
28 000
25 575
34 658
(i) Sales profit volume variance
Flexed budget net profit Original budget net profit
£ 25 575 28 000
2 425 (A)
(ii) Sales price variance
Actual volume of sales at actual selling price:
2950 × £73
= 215 350
Actual volume of sales at standard selling price:
2950 × £72
= 212 400
2 950 (F)
(iii) Materials price variances
(a) Metals
£
Actual volume of material at actual price:
2950 × 0.9kg × £13.80 = 36 639
Actual volume of material at standard price:
2950 × 0.9kg × £14
= 37 170
531 (F)
(b) Plastics
£
Actual volume of material at actual price:
2950 × 0.5kg × £7.20 = 10 620
Actual volume of material at standard price:
2950 × 0.5kg × £7
= 10 325
295 (A)
(iv) Material quantity variances
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Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(a) Metals
£
Actual volume of material at standard price:
2950 × 0.9kg × £14
= 37 170
Standard volume of material at standard price:
2950 × 1kg × £14
= 41 300
4 130 (F)
(b) Plastics
There is no quantity variance because actual and standard usage are the same.
(v) Labour rate variance £
Actual hours at actual wage rate: 2950 × 0.7hours × £8.20 = 16 933 Actual hours at standard wage rate: 2950 × 0.7hours × £8.00 = 16 520
413 (A)
(vi) Labour efficiency variance £
Actual hours at standard wage rate: 2950 × 0.7hours × £8 = 16 520 Standard hours at standard wage rate: 2950 × 0.75hours × £8 = 17 700
1 180 (F)
(vii) Overheads variances Production overhead variance Budget production overhead Actual production overhead
£ 86 500 84 250
2 250 (F)
Other overheads variance
£
7
Budget other overheads Actual other overheads
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
31 000
32 250
1 250 (A)
(b) Quayle Products plc: Standard cost operating statement November 20X2
Total
£
Original budgeted net profit
28 000
Sales profit volume variance
(2 425)
Flexed budget net profit
25 575
Other variances
Sales price variance Direct materials price variance – metals Direct materials price variance – plastics Direct materials quantity variance Direct labour rate variance Direct labour efficiency variance Production overhead variance Other overhead variance Total Actual net profit
Favourable £ 2 950 531
4 130
1 180 2 250
11 041
(Adverse) £
(295)
(413)
(1 250) (1 958)
9 083 34 658
(c) Reasons for price variances
There are four price variances: sales price variance, two materials price variances and labour rate variance. Taking each in turn:
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Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Sales price variance: in this case the variance is favourable, because the price charged was higher than budget (£73 rather than £72). This increase is clearly not very large. It may have become possible to increase the price if competitors were seen to be increasing their prices. Or, possibly a major competitor has left the market allowing Quayle to increase its price.
Materials price variances: the positive price variance (for metal) may have arisen because a bulk purchase at a lower price became available, or possibly because a price negotiation was more successful than expected. The negative price variance could have arisen because a slightly better quality material was purchased.
Labour rate variance: the actual wage rate was higher than budget. This may be because wage negotiations turned out to be less favourable for the employer than originally anticipated.
In each case the variation from standard cost may simply be because the original estimates of standard costs were inaccurate.
2. Robertson Rix Limited
Flex the budget for overheads:
Original budget
£
Variable production overheads: 1500 × 2.25 × £6 1520 × 2.25 × £6
20 250
Actual – given in question
Fixed production overheads 1500 × 2.25 × £7.80 1520 × 2.25 × £7.80
26 325
Actual – given in question
Flexed budget £
20 520
26 676
Actual £
21 360
26 201
(a) variable production overhead variance Actual variable production overhead Flexed budget variable production overhead
21 360 20 520
840 (A)
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Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(b) fixed production overhead variance
Actual fixed production overhead
26 201
Flexed budget fixed production overhead
26 676
475 (F)
4. Selly Watkins plc
1. An adverse sales price variance indicates that selling prices actually charged were less than budgeted. The explanation is therefore implausible.
2. A better than expected quantity discount on materials purchases would give rise to a favourable variance. The explanation is therefore plausible.
3. Higher quality materials would be expected to give rise to a favourable quantity variance. The explanation is implausible.
4. The labour efficiency variance is positive and could well have arisen because the production workers are more efficient than expected. The explanation is plausible.
5. This explanation is plausible.
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Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Standard costing, flexible budgeting and variance analysis
Questions
1. Priory Pegamoid Limited produces a range of parts for industrial weaving machines. The budget sales and prime costs for April 20X1 for component L63A are as follows:
Sales: 600 units × £25 per unit
£ 15 000
Costs Direct materials: 600 units × (1kg × £6) Direct labour: 600 units × (1.2 hours × £8)
3 600 5 760
Prime cost
9 360
You are required to flex the budget for a sales and production level of 575 units.
2. Quayle Products plc manufactures waste disposal units. Its sales and costs budget for November 20X2 is as follows:
Sales: 3000 units × £72
£ 216 000
Costs Direct materials (metal) 3000 × (1kg × £14) Direct materials (plastic) 3000 × (£0.5kg × £7) Direct labour: 3000 × (0.75 hours × £8)
(42 000) (10 500) (18 000)
Production overhead
(86 500)
59 000
Other overheads
(31 000)
Net profit
28 000
The company does not absorb production overheads using an overhead absorption rate. It may be assumed that all of its overheads are fixed in nature. The company’s actual results for the month are as follows:
£
Sales: 2950 units × £73
215 350
1
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Costs Direct materials (metal) 2950 × (0.9kg × £13.80) Direct materials (plastic) 2950 × (£0.5kg × £7.20) Direct labour: 2950 × (0.7 hours × £8.20)
(36 639) (10 620) (16 933)
Production overhead
(84 250)
66 908
Other overheads
(32 250)
Net profit
34 658
You are required to: (a) calculate:
(i) sales profit volume variance (ii) sales price variance (iii) materials price variance (for both metal and plastic) (iv) materials quantity variance (for both metal and plastic) (v) direct labour rate variance (vi) direct labour efficiency variance (vii) overheads variances (b) prepare a standard cost operating statement (c) suggest reasons for any price variances you have calculated.
3. Robertson Rix Limited is a manufacturing company. In January 20X6 it budgeted for 1500 units of production, each of which uses 2.25 hours of machine time. Production overhead absorption rates had been budgeted as follows for the financial year:
Variable production overhead
£6 per machine hour
Fixed production overhead
£7.80 per machine hour
The actual level of production in the month was 1520 units. The actual expenditure on variable production overhead in the month was £21 360. The actual expenditure on fixed production overhead in the month was £26 201.
You are required to calculate:
(a) the variable production overhead variance
(b) the fixed production overhead variance
2
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
4. Selly Watkins plc makes bathroom fittings. The directors have monthly board meetings at which, amongst other things, they discuss the most recent standard cost operating statement. The statement for April 20X3 reads as follows:
Total
£
Original budgeted net profit
216 760
Sales profit volume variance
5 866
Flexed budget net profit
222 616
Other variances
Sales price variance Direct materials price variance Direct materials quantity variance Direct labour rate variance Direct labour efficiency variance Variable overhead variance Fixed overhead variance Total Actual net profit
Favourable £
8 760
(Adverse) £ (2 689)
(9 989)
—
—
660
(8 828)
9 420
(9 771) (31 277)
(21 857) 200 769
The directors are concerned that the net adverse variance for the month is more than 10% of the original budgeted net profit. They call in the management accountant for some explanations. He comes up with the following points:
1. The sales team decided to raise prices in the middle of April and we haven’t yet adjusted the standard prices to reflect this increase.
3
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
2. We obtained a really good quantity discount on materials from a new supplier.
3. The materials quantity variance is due to the fact that the materials we’ve bought in recently have been of higher quality than we originally anticipated.
4. The labour efficiency variance probably arises because the new production line staff we took on in April are really very efficient workers.
5. The overhead variances are unfortunate, but the problem really is that we underestimated the level of both fixed and variable overheads when we were setting the original budget.
Three of these explanations are quite plausible; two are not. Required: identify which explanations for the variances that have occurred in April 20X3 are plausible and which are implausible.
4
Answers
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
1. Priory Pegamoid Limited: flexed budget for 575 units
Sales: 575 units × £25 per unit Costs Direct materials: 575 units × (1kg × £6) Direct labour: 575 units × (1.2 hours × £8) Prime cost
£ 14 375
3 450 5 520 8 970
2. Quayle Products plc Flexed budget for 2950 units
Sales: 2950 units × £72 Costs Direct materials (metal) 2950 × (1kg × £14) Direct materials (plastic) 2950 × (£0.5kg × £7) Direct labour: 2950 × (0.75 hours × £8) Production overhead
Other overheads Net profit
£ 212 400
(41 300) (10 325) (17 700) (86 500)
56 575 (31 000)
25 575
Setting the original budget, flexed budget and actual results side by side:
Sales Costs Direct material – metal Direct material – plastic
Original budget £ 216 000
(42 000) (10 500)
Flexed budget £ 212 400
(41 300) (10 325)
Actual
£ 215 350
(36 639) (10 620)
5
Direct labour Production overhead
Other overheads
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(18 000) (17 700) (16 933)
(86 500) (86 500) (84 250)
59 000
56 575
66 908
(31 000) (31 000) (32 250)
28 000
25 575
34 658
(i) Sales profit volume variance
Flexed budget net profit Original budget net profit
£ 25 575 28 000
2 425 (A)
(ii) Sales price variance
Actual volume of sales at actual selling price:
2950 × £73
= 215 350
Actual volume of sales at standard selling price:
2950 × £72
= 212 400
2 950 (F)
(iii) Materials price variances
(a) Metals
£
Actual volume of material at actual price:
2950 × 0.9kg × £13.80 = 36 639
Actual volume of material at standard price:
2950 × 0.9kg × £14
= 37 170
531 (F)
(b) Plastics
£
Actual volume of material at actual price:
2950 × 0.5kg × £7.20 = 10 620
Actual volume of material at standard price:
2950 × 0.5kg × £7
= 10 325
295 (A)
(iv) Material quantity variances
6
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(a) Metals
£
Actual volume of material at standard price:
2950 × 0.9kg × £14
= 37 170
Standard volume of material at standard price:
2950 × 1kg × £14
= 41 300
4 130 (F)
(b) Plastics
There is no quantity variance because actual and standard usage are the same.
(v) Labour rate variance £
Actual hours at actual wage rate: 2950 × 0.7hours × £8.20 = 16 933 Actual hours at standard wage rate: 2950 × 0.7hours × £8.00 = 16 520
413 (A)
(vi) Labour efficiency variance £
Actual hours at standard wage rate: 2950 × 0.7hours × £8 = 16 520 Standard hours at standard wage rate: 2950 × 0.75hours × £8 = 17 700
1 180 (F)
(vii) Overheads variances Production overhead variance Budget production overhead Actual production overhead
£ 86 500 84 250
2 250 (F)
Other overheads variance
£
7
Budget other overheads Actual other overheads
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
31 000
32 250
1 250 (A)
(b) Quayle Products plc: Standard cost operating statement November 20X2
Total
£
Original budgeted net profit
28 000
Sales profit volume variance
(2 425)
Flexed budget net profit
25 575
Other variances
Sales price variance Direct materials price variance – metals Direct materials price variance – plastics Direct materials quantity variance Direct labour rate variance Direct labour efficiency variance Production overhead variance Other overhead variance Total Actual net profit
Favourable £ 2 950 531
4 130
1 180 2 250
11 041
(Adverse) £
(295)
(413)
(1 250) (1 958)
9 083 34 658
(c) Reasons for price variances
There are four price variances: sales price variance, two materials price variances and labour rate variance. Taking each in turn:
8
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
Sales price variance: in this case the variance is favourable, because the price charged was higher than budget (£73 rather than £72). This increase is clearly not very large. It may have become possible to increase the price if competitors were seen to be increasing their prices. Or, possibly a major competitor has left the market allowing Quayle to increase its price.
Materials price variances: the positive price variance (for metal) may have arisen because a bulk purchase at a lower price became available, or possibly because a price negotiation was more successful than expected. The negative price variance could have arisen because a slightly better quality material was purchased.
Labour rate variance: the actual wage rate was higher than budget. This may be because wage negotiations turned out to be less favourable for the employer than originally anticipated.
In each case the variation from standard cost may simply be because the original estimates of standard costs were inaccurate.
2. Robertson Rix Limited
Flex the budget for overheads:
Original budget
£
Variable production overheads: 1500 × 2.25 × £6 1520 × 2.25 × £6
20 250
Actual – given in question
Fixed production overheads 1500 × 2.25 × £7.80 1520 × 2.25 × £7.80
26 325
Actual – given in question
Flexed budget £
20 520
26 676
Actual £
21 360
26 201
(a) variable production overhead variance Actual variable production overhead Flexed budget variable production overhead
21 360 20 520
840 (A)
9
Management Accounting for Non Specialists 2nd Edition © Catherine Gowthorpe 2005 Cengage
(b) fixed production overhead variance
Actual fixed production overhead
26 201
Flexed budget fixed production overhead
26 676
475 (F)
4. Selly Watkins plc
1. An adverse sales price variance indicates that selling prices actually charged were less than budgeted. The explanation is therefore implausible.
2. A better than expected quantity discount on materials purchases would give rise to a favourable variance. The explanation is therefore plausible.
3. Higher quality materials would be expected to give rise to a favourable quantity variance. The explanation is implausible.
4. The labour efficiency variance is positive and could well have arisen because the production workers are more efficient than expected. The explanation is plausible.
5. This explanation is plausible.
10