BASIC QUESTIONS OF STANDARD COSTING Question-1- MATERIAL The Standard Cost for producing 180 kgs of a product whose Raw Material inputs are A and B is given below – Material A 60 kgs at Rs 10 per kg Rs. 600Material B 140 kgs at Rs 2 per kg Rs. 280

  Rs. 880

The Actual Prices of A and B were Rs 12 and Rs 8 per kg respectively. Consumption of B was 108 kg. The Actual Output at 80% yield was 144 kg. Calculate the following Direct Material Variances – (i) Mix Variances, (ii) Yield Variance, (iii) Price Variance, and (iv) Usage Variance.

Solution:

1. Computation of Actual Output:

(a) Actual Output at 80% yield = 144 Kg (given)

(b) So, Actual Input = 𝟏𝟒𝟒

𝟖𝟎% = 180 Kg. Out of the above, B = 108 Kg (given). So, A = 180 -

108 = 72 Kg. 2. Computation of Standard Quantity (SQ) 3. Computation of Revised Actual

Quantity (RAQ)Given: 60 +140 = 200 Kg of RM can produce 180 Kg of FG.

Since Actual Output is 144 kg, SQ= 144 × 𝟐𝟎𝟎

𝟏𝟖𝟎 =

160 kg. Total AQ Consumed = 180 kg, re-writtenin Std Mix

Material A B Material A B Standard Mix 6 14 Standard Mix 6 14 Standard Qtty 48 kg 112 kg RAQ 54 kg 126 kg4. Variance Computation Chart Particulars Col. (1): SQ × SP Col. (2): RAQ ×

SPCol. (3): AQ × SP Col. (4): AQ × AP

Material A 48 kg× Rs. 10 = 480 54 kg × Rs. 10 = 540

72 kg × Rs. 10 = 720 72 kg × Rs. 12 =864

Material B 112 kg × Rs. 2 = 224 126 kg × Rs. 2 = 252

108 kg × Rs. 2 = 216 108 kg × Rs. 8 =864

Total Rs. 704 Rs. 792 Rs. 936 Rs. 1728

Material Yield + Material Mix + Material Price

Variance = Rs. 704 -Rs. 792 = Rs. 88 A

Variance = Rs. 792 -Rs. 936 =Rs. 144 A

Variance = Rs. 936- Rs. 1,728 = Rs.792 A

Material Usage Variance = Rs. 704- Rs. 936 = Rs. 232 A + Material Price Variance b/fd as

above = Rs. 792 A

Total Material Cost Variance = Rs. 704 - Rs.

1,728 = Rs. 1,024 A

Material-wise Breakup of Variances: Particulars Material A Material B Total (a) Yield Variance = Col. (1) - Col. (2) Rs. 60 A Rs. 28 A Rs. 88 A (b) Mix Variance = Col. (2) - Col. (3) Rs. 180 A Rs. 36 F Rs. 144 A (c) Usage Variance (a+b) = Col. (1) - Col. (3)Rs. 240 A Rs. 8 F Rs. 232 A(d) Price Variance = Col. (3) - Col. (4) Rs. 144 A Rs. 648 A Rs. 792 A(e) Total Material Cost Variance (c+d)= Col. (1) - Col. (4)

Rs. 384 A Rs. 640 A Rs. 1,024 A

Question-2 - LABOUR The following information relates to Labour of X Ltd – Type of Labour Skilled Semi-

SkilledUnskilled Total

No. of workers in Standard gang Standard Rate per hour (Rs) No. of workers in Actual gang Actual Rate per hour (Rs)

46?7

33?2

2 1 ? 2

9

9

In a 40 hour week, the gang produced 270 standard hours. The actual number of Semi-Skilled Workers is two times the actual number of Unskilled Workers. The Rate of Variances of Semi-Skilled Workers is Rs 160 (F). Find the following – (a) Number of Workers in each category, (b) Total Gang Variance, (c) Total Sub-Efficiency Variance, (d) Total Labour Rate Variance, and (e) Total Labour Cost Variance.

Solution:

1. Computation of Number of Workers in each category

(a) Rate Variance of Semi-Skilled Workers = AH × (SR - AR) = AH × (Rs. 3 - Rs. 2) = Rs. 160F (given)

(b) Hence, AH = 160 hours for Semi-Skilled Workers. So, Actual Semi-Skilled Workers =

= 4 workers.

(c) Since, Semi-Skilled Workers is twice the Unskilled Workers, Actual Unskilled Workers =442=2 workers. (d) Therefore, Skilled Workers = Total 9 - Semi-Skilled 4 - Unskilled 2 = 3 workers. 2. Computation of Standard Hours (SH) 3. Computation of Revised Actual Hours

(RAH)Total Standard Hours (Given) = 270 hours Total AH = 9 workers × 40 = 360 hours

Grade Skilled Semi-

skilled Unskilled Grade Skilled Semi-

skilled Unskilled

Standard Mix

4 3 2 Standard Mix

4 3 2

Standard Hours

120 hours

90 hours 60 hours RAH 160 hours 120 hours 80 hours

4. Variance Computation Chart Particulars CoL (1): SH × SR Col. (2): RAH × SRCol. (3): AH × SR Col. (4): AH × ARSkilled 120 hrs × Rs. 6 =

Rs. 720 160 hrs × Rs. 6 = Rs. 960

(3 × 40) × Rs. 6 = Rs. 720

(3 × 40) × Rs. 7 =Rs. 840

Semi-skilled

90 hrs × Rs. 3 = Rs. 270

120 hrs × Rs. 3 = Rs. 360

(4 × 40) × Rs. 3 = Rs. 480

(4 × 40) × Rs. 2 =Rs. 320

Unskilled 60 hrs × Rs. 1 = Rs. 60

80 hrs ×Rs. 1 = Rs. 80

(2 × 40) × Rs. 1 = Rs. 80

(2 × 40) × Rs.2 =Rs. 160

Total Rs. 1,050 Rs. 1,400 Rs. 1,280 Rs. 1,320

Sub-efficiency

Variance = Rs. 1,050 -Rs. 1,400 = Rs. 350 A

+ Mix Variance = Rs. 1,400 - Rs. 1,280= Rs. 120 F

+ Rate Variance = Rs. 1,280 - Rs.1,320 = Rs. 40 A

Efficiency Variance = Rs. 1,050 - Rs.

1,400 = Rs. 230 A + Rate Variance b/fd as above =Rs. 40 A

Total Labour Cost Variance = Rs. 1,050 - Rs.

1,320 = Rs. 270 A

Grade-wise Breakup of Labour Variances Particulars Skilled Semi-skilledUnskilled Total(a) Sub-Efficiency Variance = Col.(1) - Col. Rs. 240 A Rs. 90 A Rs. 20 A Rs. 350 A

(2) (b) Mix Variance = Col. (2) - Col. (3) Rs. 240 F Rs. 120 A Nil Rs. 120 F(c) Efficiency Variance (a+b) = Col. (1) - Col. (3)

Nil Rs. 210 A Rs. 20 A Rs. 230 A

(d) Rate Variance = Col. (3) - Col. (4) Rs. 120 A Rs. 160 F Rs. 80 A Rs.40 A(e) Total Labour Cost Variance (c+d) = Col. (1) – Col (4)

Rs. 120 A Rs. 50 A Rs. 100 A Rs. 270 A

Question-3 – VARIABLE O/H From the following information pertaining to January, calculate the Overhead Variances – Particulars Production (in units) Variable Overheads

(Rs) Hours worked

Budgeted 300 7,800 (see Note 1) Actual 250 7,000 4,500 (See Note

2) Note: 1. Standard time for 1 unit is 20 hours. 2. This includes 300 hours Abnormal Idle Time.

Solution:

1. Basic Computations

(a) VOH Standard Rate per hour =

= . ,

= Rs. 1.30 per hour.

(b) VOH Standard Rate per unit =

= . ,

= Rs. 26 per unit.

2. Variance Computation Chart Alternative 1: Computation based on Time Alternative 2: Computation based on

OutputCol.(1): SH × SR

Col.(2):AH× SR

Col.(3):AVOH Col.(1):AO×SRCol.(2): SO×SR

Col.(3):AVOH

(250×20) × Rs. 1.30 ph = Rs. 6,500

4,500 hrs ×Rs. 1.30 ph = Rs. 5,850

Given = Rs. 7,000

250 uts × Rs. 26 pu = Rs. 6,500

225 uts × Rs. 26 pu = Rs. 5,850

Given = Rs.7,000

Efficiency Variance = Rs. 6,500 - Rs. 5,850 = Rs. 650 F

+

Expenditure Variance = Rs. 5,850- Rs. 7,000 = Rs.1,150 A

Efficiency Variance = Rs. 6,500 - Rs. 5,850 = Rs. 650 F

+

Expenditure Variance = Rs.5,850 - Rs.7,000 = Rs.1,150 A

Total VOH Cost Variance Total VOH Cost Variance =

= Rs. 6,500 - Rs. 7,000 =Rs. 500 A

Rs. 6,500 - Rs. 7,000 = Rs.500 A

Note: VOH Idle Time Variance = AbnormalIdle Hrs × Std Rate ph = 300 hours × Rs. 1.30ph = Rs. 390 A. Hence, VOH Net Efficiency Variance = Gross or Basic Efficiency Variance less IdleTime Variance = Rs. 650 F - Rs. 390 A = Rs.1,040 F

Note: Std Output = ,

= 225

units

Question-4 – FIXED O/H From the following information pertaining to February, calculate the Overhead Variances. Particulars Budgeted ActualNumber of working days Production in units Fixed Overhead in Rs

25 20,000 30,000

27 22,000 31,000

Budgeted Fixed Overhead Rate is Rs 1 per hour. Actual Hours Worked in February in 31,500.

Solution:

1. Basic Computations

(a) FOH Standard Rate per hour =

= . ,

, = Rs. 1 per hour, (given)

Note: In the above calculation, BH = 30,000 hrs is the balancing figure.

(b) FOH Standard Rate per unit =

= . ,

, = Rs. 1.50 per unit.

2. Variance Computation Chart Col.(1): AO × SR Col.(2): AH ×

SR AD Col.(3): PFOH = BFOH × — BD

Col.(4): BFOH

Col.(5): AFOH

22,000 units × Rs. 1.50 pu = Rs. 33,000

31,500 hrs × Rs. 1 ph = Rs. 31,500

Rs. 30,000 × 2— = Rs. 32,400 25

Given = Rs. 30,000

Given = Rs.31,000

Efficiency Variance = Rs. 33,000 - Rs. 31,500 = Rs. 1,500 F

+ Capacity Variance = Rs. 31,500 - Rs. 32,400 = Rs. 900 A

+

Calendar Variance = Rs. 32,400 - Rs. 30,000 = Rs. 2,400 F

+

Expenditure Variance = Rs. 30,000-Rs. 31,000 = Rs. 1,000 A

Volume Variance = Rs. 33,000 - Rs. 30,000 = Rs. 3,000 F + Expenditure Variance b/fd as above =

Rs. 1,000 A

Total FOH Cost Variance = Rs. 33,000 - Rs. 31,000 = Rs. 2,000 F

Question-5 - RATIOS A Company manufactures two products X and Y. Product X requires 8 hours to produce while Product Y requires 12 hours. In April, of 22 effective working days of 8 hours a day, 1,200 units of X and 800 units of Y were produced. The Company employs 100 workers in Production Department to produce X and Y. The budgeted hours are 1,86,000 for the year. Calculate Capacity, Activity and Efficiency Ratio and establish their inter-relationship.

Solution:

Note: Budget Ratios are computed using FOH Variance Chart, as under - FOH Cost item

Col.(1): AO × SR = SH × SR

Col.(2): SO × SR = AH × SR

Col.(3): PFOH = PH × SR

Col. (4): BFOH = BH × SR

Col.(5): AFOH

Time Factor therein

SH AH PH BH -

(1,000 uts × 5 hrs) + (600 uts × 10 hrs) = 11,000 hrs

25 days×8 hrs×50 men = 10,000 hrs

N.A in this question.

, , = 8,500 hrs

N.A

Efficiency

Ratio = = .

. = ,

, = 110.0C %

× Capacity Ratio = = .

. = ,

, =

117.65%

Volume or Activity Ratio= = .

. = ,

, = 129.42% (or 110.00%

× 117.65%)

Relationship: Activity Ratio= Efficiency Ratio × Calendar Ratio (if any) × Capacity Ratio = 110.00% × 117.65% = 129.42%

Question-6– MULTIPLE VARIANCES The following data has been extracted from the books of Guru Enterprises which is using Standard Costing system – Actual Output = 9,000 unitsDirect Wages paid = 1,10,000 hrs at Rs22 ph of which 5,000 hours, being idle

time, were not recorded in production Standard Hours = 10 hours per unitLabour Efficiency Variance

= Rs 3,75,000(A)

Standard Variable OH = Rs 150 per unit Actual Variable OH = Rs 16,00,000

Compute – (a) Idle Time Variance, (b) Total Variable OH Variances, (c) Variable OH Expenditure Variable, (d) Variable OH Efficiency Variance.

Solution:

1. Computation of Standard Wage Rate Per Hour Note: Labour Efficiency Variance given in question is taken as Labour (Net) Efficiency Variance, i.e. after adjusting Idle Time. • (SH × SR) - (Net AH × SR) = 3,75,000A (adjusted net of Idle Time) • (9,000 units × 10 hours × SR) - [(1,10,000 - 5,000) × SR] = 3,75,000A - 15,000 SR = - 3,75,000 • On solving, SR = Rs. 25 per hour. 2. Labour Cost Variances Col.(1): SH × SR Col.(2): Net AH × SR Col.(3): Total AH ×

SRCol.(4): Total AH× AR

(9,000 uts × 10 hrs) × Rs. 25 ph = Rs. 22,50,000

(1,10,000 - 5,000) hrs × Rs. 25 ph = Rs. 26,25,000

1,10,000 hrs × Rs. 25 ph = Rs. 27,50,000

1,10,000 hrs × Rs.22 ph = Rs.24,20,000

Labour (Net) Efficiency

Variance = Rs. 22,50,000 - Rs. 26,25,000 = Rs. 3,75,000 A

+ Labour Idle Time Variance = Rs. 26,25,000 - Rs. 27,50,000 = Rs. 1,25,000 A

+ Labour Rate Variance =Rs. 27,50,000 - Rs.24,20,000 = Rs.3,30,000 F

(Gross) Efficiency Variance =Rs. 22,50,000 - Rs.

27,50,000 =Rs. 5,00,000 A + Rate Variance b/fd as above

=Rs. 3,30,000 F

Total Labour Cost Variance - Rs. 22,50,000 - Rs.24,20,000 - Rs. 1,70,000 A

3. Variable OH Cost Variances Note: Since 1 unit requires 10 hours and VOH per unit is Rs. 150, VOH per hour = Rs. 150 ⇒ 10 hours= Rs. 15 ph Col.(1): AO×SR (or) SH×SR

Col.(2): Net AH × SR Col.(3): Total AH × SR

Col.(4): AVOH

9,000 units × Rs. 150 pu = Rs. 13,50,000

(1,10,000 - 5,000) hours × Rs. 15 ph = Rs. 15,75,000

1,10,000 hrs × Rs. 15 ph = Rs. 16,50,000

Given = Rs. 16,00,000

(Net) Efficiency Variance

= Rs. 13,50,000 - Rs. 15,75,000 = Rs. 2,25,000 A

+ Idle Time Variance = Rs. 15,75,000 - Rs. 16,50,000 = Rs. 75,000 A

+ Expenditure Variance =Rs. 16,50,000 - Rs.16,00,000 = Rs. 50,000F

(Gross) Efficiency Variance =Rs. 13,50,000 - Rs.

16,50,000 =Rs. 3,00,000 A + Expenditure Variance b/fd as

above =Rs. 50,000 F

Total VOH Cost Variance = Rs. 13,50,000 - Rs.16,00,000 = Rs. 2,50,000 A

Question-7 A Company is engaged in manufacturing of several products. The following data have been obtained from the record of a machine shop for an average month – Budgeted Actual No. of working days Working hours per day No. of Direct workers Efficiency Down time Overheads Fixed Variable

24 8 150 One Standard Hour per Clock Hour 10% Rs 75,400 Rs 90,720

Overhead Fixed Variable Net Operator Hours worked Standard Hours produced There was a special holiday in August.

Rs 78,800 Rs 70,870 20,500 22,550

Required: 1. Calculate Efficiency, Activity, Calendar and Standard Capacity Usage Ratio. 2. Calculate all the relevant Fixed Overhead Variances. 3. Calculate Variable Overheads Expenditure and Efficiency Variances.

Solution:

1. Basic Computations (a) Budgeted Hours = 24 × 8 × 150 = 28,800 hours less 10% down time = 25,920 hours.

(b) VOH Standard Rate per Hour = = . ,

, = Rs. 3.50 per hour

(c) FOH Standard Rate per Hour = = . ,

, = Rs. 2.91 per hour

2. VOH Variances

Col. (1): SH × SR Col. (2): AH × SR Col. (3): AVOH (22,550 hrs× Rs. 3.50) = Rs. 78,925

20,500 hrs× Rs. 3.50 = Rs. 71,750 (given)

(Given) = Rs. 70,870

Efficiency Variance = Rs. 78,925 - Rs.

71,750 = Rs. 7,175 F + Expenditure Variance = Rs. 71,750 - Rs.

70,870 = Rs. 880 F

Total VOH Cost Variance = Rs. 78,925 - Rs. 70,870 - Rs.

8,055 F

3. FOH Variances Col.(1): AO × SR = SH× SR

Col (2): AH × SR Col.(3):PFOH = BFOH ×

ADBD

Col.(4): BFOH

Col.(5): AFOH

22,550 hrs × Rs. 2.91= Rs. 65,621

20,500 hrs× 2.91 = Rs. 59,655

Rs. 75,400 × || = Rs. 72,258

Given Rs. 75,400

Given Rs.78,800

Efficiency

Variance = Rs. 65,621 - Rs. 59,655 = Rs. 5,966 F

+ Capacity Variance = Rs. 59,655 - Rs. 72,258 = Rs. 12,603 A

+ Calendar Variance = Rs. 72,258 - Rs. 75,400 = Rs. 3,142 A

+ Expenditure Variance = Rs. 75,400 - Rs. 78,800 = Rs. 3,400 A

Volume Variance = Rs. 65,621 - Rs. 75,400 =

Rs. 9,779 A + Expenditure Variance b/fd as above

= Rs. 3,400 A

Total FOH Cost Variance = Rs. 66,000 - Rs. 62,000 = Rs.

4,000 F

Budget Ratios: Efficiency Ratio = Capacity Ratio = Calendar Ratio = Note: Budget

Ratios arecomputed usingFOH VarianceChart itself, uptoCol.(4). Column 5(AFOH) is notrelevant forRatio Computation.

.

. = . ,

. , = × = .

. = . ,

. , = × = .

. = . ,

. , =

110.00% 82.56% 95.83%

Volume Ratio = .

. = . ,

. , = 87.03% (or 110% × 82.56% × 95.83%)

Question-8 - STANDARD COSTING+ MARGINAL COSTING

Prince Edward & Co. used a full standard cost system with raw materials inventory carried at Standard. The following data were taken from the records of the company for the year ended 31.12.2013: Rs Opening raw materials inventory 300Closing raw materials inventory 250Net purchases 410Material price variance 10 (A)Material usage variance 20 (A)Direct labour cost (Actual) 900Direct labour cost at standard 840Actual overhead cost incurred 875Overheads cost variance 45 (F)Opening work-in-progress inventory 120Closing work-in-progress inventory 140Opening finished goods inventory 360Cost of goods sold reported 2,240

Note: “F” denotes favourable and “A” denotes adverse. You are required to compute: 1. Raw material Purchases at standard. 2. Raw materials consumed at standard. 3. Labour cost variance. 4. Standard overhead costs. 5. Total manufacturing cost at standard. 6. Cost of goods manufactured. 7. Cost of products sold to customers. 8. Closing finished goods inventory.

Solution:

COMPUTATION OF REQUIREMENTS 1. Raw Material Purchases at Standard Net Purchases at actual 410 Less: Material Price Variance (A) 10 400 2. Raw Materials Consumed at Standard Opening Stock at Standard 300 Add: Purchases at Standard (as per 1) 400

700 Less: Closing Stock at Standard 250 450 3. Labour Cost Variance Direct Labour Cost at Standard 840 Less: Actual Direct Labour Cost 900 Adverse 60 4. Standard Overhead Cost Actual Overhead Cost 875 Add: Overhead Cost Variance (Favourable) 45 920 5. Total Manufacturing Cost at Standard Standard Raw Material Cost 450 Standard Direct Labour Cost 840 Standard Overhead Cost 920 2,210 6. Cost of Goods Manufactured (at Standard) Opening WIP (at Standard) 120 Add: Total Cost of Goods Manufactured (at Standard) 2,210 Less: Closing WIP (at Standard) 140 2,190 7. Cost of Products Sold to Customers (at Standard) Cost of Goods Sold Reported 2,240 Less: Adverse Cost Variances Material Price Variance 10(A) Material Usage Variance 20(A) Direct Labour Cost Variance 60(A) Add: Favorable Cost Variances 90 Overhead Cost Variance 45

Question-9 - EQUIVALENT PRODUCTION A Single Product Company has prepared the following Cost Sheet based on 8,000 units of output per month – Direct Materials 1.5 Kg at Rs 24 per kg Direct Labour 3 hours at Rs 4 per hour Factory Overheads

Rs 36.00Rs 12.00Rs 12.00

Total Rs 60.00The Flexible Budget for Factory Overheads is as under – Output (units) 6,000 7,500 9,000 10,500 Factory Overheads (Rs.) 81,600 92,400 1,03,200 1,14,000

The actual results for the month of October are given below – Actual Output is 7620 units. Direct Materials purchased and consumed were 11,224 Kg at Rs 2,66,570. Direct Labour hours worked were 22,400 and Direct Wages paid amounted to Rs

96,320 Factory OH incurred amounted to Rs 96,440 out of which the Variable OH is Rs 2.60

per DLH worked. Work-in-Process: Opening WIP : 300 units: Materials 100% complete, Labour and Overheads 60% complete. Closing WIP : 200 units: Materials 50% complete Labour and Overheads 40%

complete. You are required to analyze the variances.

Solution:

1. Statement of Equivalent Production fin units) (FIFO Method) Particulars Input Particulars Output Materials Lat lour Overheads Transfer from: % E.U °/o E.U % E.UOpg. WIP 300 - Opg WIP 300 - - 40% 120 40% 120Fresh units 7,520 - fresh

units(b√f) 7,320 100% 7,320 100% 7,320 100% 7,320

Total transfer 7,620 7,320 7,440 7,440 Closing WIP 200 50% 100 40% 80 40% 80Total 7,820 Total 7,820 7,420 7,520 7,5202. Analysis of VOH and FOH and Rate Computation

(a) VOH Std Rate per unit = 𝐃𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐢𝐧 𝐎𝐇

𝐃𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐢𝐧 𝐎𝐮𝐭𝐩𝐮𝐭 = 𝐑𝐬.𝟗𝟐,𝟒𝟎𝟎 𝐑𝐬.𝟖𝟏,𝟔𝟎𝟎

𝟕,𝟓𝟎𝟎 𝟔,𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬 =Rs. 7.20 p.u.

(b) VOH Std Rate per hour = 𝐑𝐬.𝟕.𝟐𝟎

𝟑 𝐡𝐨𝐮𝐫𝐬 = Rs. 2.40 per hour.

(c) FOH Std Rate per unit = Total OH - Variable OH per unit = Rs. 12.00 - Rs. 7.20 = Rs. 4.80 per unit.

(d) FOH Std Rate per hour = 𝐑𝐬.𝟒.𝟖𝟎

𝟑 𝐡𝐨𝐮𝐫𝐬 = Rs. 1.60 per hour.

3. Computation of Materials Variances Col. (1): SQ × SP Col. (2): AQ × SP Col. (3): AQ × AP (7,420 uts × Rs. 1.5) × Rs. 24 = 11,224 kg × Rs. 24 = Rs. 11,224 kg × Rs. 23.75 = Rs.

Rs. 2,67,120 2,69,376 2,66,570

Usage Variance = Rs. 2,67,120 - Rs. 2,69,376=Rs. 2,256 A + Price Variance = Rs. 2,69,376 - Rs.

2,66,570 = Rs. 2,806 F

Total Material Cost Variance = Rs. 2,67,120 - Rs. 2,66,570

= Rs. 550 F

4. Computation of Labour Variances Col. (1): SH × SR Col. (2): AH × SR Col. (3): AH × AR (7,520 uts × Rs. 3) × Rs. 4 = Rs. 90,240

22,400 hrs × Rs. 4 = Rs. 89,600

22,400 hrs × Rs. 4.30 = Rs.96,320

Efficiency Variance = Rs. 90,240 - Rs. 89,600 = Rs. 640 F + Rate Variance = Rs. 89,600 - Rs. 96,320 =

Rs. 6,720 A

Total Labour Cost Variance= Rs. 90,240 - Rs. 96,320 = Rs.

6,080 A

5. Computation of VOH Variances Col. (1): SH × SR Col.(2): AH × SR Col. (3): AVOH (7,520 uts × Rs. 3) × Rs. 2.40= Rs. 54,144

22,400 hrs × Rs. 2.40 = Rs. 53,760

22,400 hrs × Rs. 2.60 = Rs.58,240

Efficiency Variance = Rs. 54,144 - Rs. 53,760 = Rs. 384 F + Expenditure Variance = Rs. 53,760 - Rs.

58,240 = Rs. 4,480 A

Total VOH Cost Variance= Rs. 54,144 - Rs. 58,240 = Rs.

4,096 A

6. Computation of FOH Variances Col. (1): AO × SR Col. (2): AH × SR Col. (3): BFOH Col. (4): AFOH 7,520 uts× Rs. 4.80 = Rs. 36,096

22,400 hrs Rs. 1.60 =Rs. 35,840

8,000 uts×Rs. 4.80=Rs. 38,400

Rs. 96,440 - Rs.58,240 =Rs. 38,200

FOH Efficiency Variance = Rs. 36,096 - Rs. 35,840 = Rs. 256 F

+FOH Capacity Variance = Rs. 35,840 - Rs. 38,400 = Rs. 2,560 A

+FOH ExpenditureVariance = Rs. 38,400 -Rs. 38,200 = Rs. 200 F

FOH Volume Variance = Rs. 36,096 - Rs. 38,400 = Rs. 2,304 A + FOH Expenditure Variance b/fd as

above = Rs. 200 F

Total FOH Cost Variance = Rs. 36,096 - Rs. 38,200 =Rs. 2,104 A

Question-10 A Company actually sold 8,000 units of A and 10,000 units of B at Rs 12 and Rs 16 per unit respectively against a budget sale of 6,000 units of A at Rs 14 per unit and 9,000 units of B at Rs 13 per unit. The Standard Costs of A and B are Rs 8 and Rs 10 per unit respectively and the corresponding actual costs are Rs 5.50 and Rs 14.50 per unit. Compute the product-wise Sales Margin Mix and Sales Margin Price Variances, indicating clearly, whether the variances are Favourable or Adverse.

Solution:

1. Computation of Revised ActualQuantity (RAQ)

2. Computation of Budgeted and Actual Margin

Total AQ Sol d = 8,000 + 10,000 = 18,000 units.

Budgeted Margin(BM) = BP -Std Cost(SC)

Actual Margin (AM) =Actual Price (AP) - StdCost (SC)

A Rs. 14-Rs.8 = Rs.6 Rs. 12-Rs.8 = Rs.4

Product Budgeted Mix RAQ

A 6 7,200 units

B 9 10,800 units

B Rs. 13-Rs. 10 = Rs. 3Rs. 16-Rs. 10 = Rs.6

3. Sales Variances under Margin / Profit Approach (Impact on Profit) Particulars Col. (1): BQ × BM Col. (2): RAQ × BM Col. (3): AQ × BM Col. (4): AQ × AMA 6,000 × Rs. 6 = Rs.

36,000 7,200 × Rs. 6 = Rs. 43,200

8,000 × Rs. 6 = Rs. 48,000

8,000 × Rs. 4 = Rs.32,000

B 9,000 × Rs. 3 = Rs. 27,000

10,800 × Rs. 3 = Rs. 32,400

10,000 × Rs. 3 = Rs. 30,000

10,000 × Rs. 6 = Rs.60,000

Total Rs. 63,000 Rs. 75,600 Rs. 78,000 Rs. 92,000

Sales Margin Quantity

Variance = Rs. 63,000 -Rs. 75,600 = Rs. 12,600 F

+ Sales Margin Mix Variance = Rs. 75,600 - Rs. 78,000 = Rs. 2,400 F

+ Sales Margin PriceVariance = Rs. 78,000 -Rs. 92,000 = Rs. 14,000F

Sales Margin Volume Variance = Rs. 63,000 - Rs. 78,000 = Rs. 15,000 F

+ Sales Margin Price Variance b/fd asabove = Rs. 14,000 F

Total Sales Margin Variance = Rs. 63,000 - Rs. 92,000 = Rs.29,000 F

Product-wise Breakup of Variances (Margin Approach): Particulars A B Total (a) Sales Margin Quantity Variance

= Col. (1) - Col. (2) Rs. 7,200 F Rs. 5,400 F Rs. 12,600F

(b) Sales Margin Mix Variance = Col. (2) - Col. (3) Rs. 4,800 F Rs. 2,400 A Rs. 2,400 F(c) Sales Margin Volume Variance (a+b)

= Col. (1) - Col. (3) Rs. 12,000 FRs. 3,000 F Rs. 15,000F

(d) Sales Margin Price Variance = Col. (3) - Col. (4) Rs. 16,000 ARs. 30,000 F Rs. 14,000F

(e) Total Sales Margin Variance (c+d)

= Col.(1) - Col. (4) Rs. 4,000 A Rs. 33,000 F Rs. 29,000F

Question-11 - REVERSE WORKING A Company produces a product X, using Raw Materials A and B. The Standard mix of A and B is 1:1 and the Standard Loss is 10% of Input. Compute the missing Information indicated by “?” based on the data given below. Particulars A B TotalStandard Price of Raw Materials (Rs/kg.) 24 30 Actual Input (Kg) ? 70 Actual Output (Kg.) ?Actual Price Rs/Kg. 30 ? Standard Input Quantity (Kg.) ? ? Yield Variance (Sub-Usage) ? ? 270(A)Mix Variance ? ? ?Usage Variance ? ? ?Price Variance ? ? ?Cost Variance 0 ? 1,300(A)

Solution:

1. Let AQ of RM-A be Q kg. So, Total AQ = (Q + 70). RAQ (in the ratio 1:1) = for both RM-A & RM-B. 2. Since Material Cost Variance of RM-A is Nil, (SQ × SP) - (AQ × AP) = (SQ × Rs. 24) - (Q × Rs. 30) = 0

So, 24 SQ = 30 Q. Hence, SQ of A = = 1.25 Q. Since Std Mix of A & B is 1:1, SQ of B is also 1.25 Q. 3. Material Yield Variance of RM-A & RM-B = (SQ × SP) - (RAQ × SP), is analysed as under - Material SQ × SP RAQ × SP Given Total Yield Variance - Rs. 270 A So,

67.5 Q - (27 Q + 1,890) = - 270 40.5 Q =1,620

A 1.25 Q × Rs. 24 = 30 Q

× Rs.24

B 1.25 Q × Rs. 30 = 37.5 Q

× Rs.30 So, Q = , = 40 Hence, AQ of RM-A = 40kg. Total 67.5 Q 27Q + 1,890

4. PAQ = = = 55 kg for both RM-A & RM-B.

SQ = 1.25 Q = 1.25 × 40 = 50 kg for both RM-A & RM-B. 5. Material Cost Variance = MCV of RM-A + MCV of RM-B = 1,300 A. Since MCV of RM-A is Nil, MCV of RM-B is 1,300A. Let Actual Price of "B" = Rs. P. So, (SQ × SP) - (AQ × AP) = (50 kg × Rs. 30) - (70 kg × Rs. P) = - Rs. 1,300. 1,500 - 70 P = - 1,300. On solving, P = 40. Hence AP of "B" is Rs. 40. 5. Variance Computation Chart Material Col. (1): SQ × SP Col. (2): RAQ × SPCol. (3): AQ × SP Col. (4): AQ × APA (WN 4) 50 kg × 24

(given) (WN 4) 55 kg × 24 (given)

(WN 3) 40 kg × 24 (given)

(WN 3) 40 kg × 30(given)

= Rs. 1,200 = Rs. 1,320 = Rs.960 = Rs. 1,200 B (WN 4) 50 kg × 30

(given) (WN 4) 55 kg × 30 (given)

(given) 70 × 30 (given)

(given) 70 × 40(WN 5)

= Rs. 1,200 = 1,650 = Rs. 2,100 = Rs. 2,800 Total Rs. 2,700 Rs. 2,970 Rs. 3,060 Rs. 4,000

Material Yield Variance = Rs. 120 A + Rs. 150 A = Rs. 270A

+ Material Mix Variance = Rs. 360 F + Rs. 450 A = Rs. 90 A

+ Material Price Variance= Rs. 240 A + Rs. 700 A= Rs. 940 A

Usage Variance = Rs. 240 F + Rs. 600 A = Rs. 360 A + Price Variance b/fd as above = Rs.

940 A

Total Material Cost Variance = 0 + Rs. 1300 A = Rs. 1300 A

Answer:

Particulars A B Total Actual Input (Kg.) 40 kg 70 kg - Actual Output (Kg.) 90kg Actual Price Rs./kg. Rs. 30 Rs. 40 Standard Input Quantity (Kg.) 50 kg 50 kg Yield Variance (Sub usage) Rs. 120 A Rs. 150 A Rs. 270 AMix Variance Rs. 360 F Rs. 450 A Rs. 90 AUsage Variance Rs. 240 F Rs. 600 A Rs. 360 APrice Variance Rs. 240 A Rs. 700 A Rs. 940 ACost Variance Rs.O Rs. 1,300 A Rs. 1,300 A

Question: 12 Compute the missing data indicated by the question marks from the following: Product R Product SStandard Sales Qty.(Units) ? ? ? 400Actual Sales Qty. (Units) 500 ? ? ?Standard Price/Unit Rs12 Rs15Actual Price/Unit Rs15 Rs20Sales Price Variance ? ? ? ? ? ?Sales Volume Variance Rs1,200 (F) ? ? ?Sales Value Variance ? ? ? ? ? ?

Sales Mix Variance for both the products together was Rs 450 (F). ’F’ denotes favourable.

Solution:

1. Sales Volume Variance for R = Col.(1) - Col.(3) = (BQ × BP) - (AQ × BP) = Rs. 1,200 F So, (BQ × Rs. 12) - (500 × Rs. 12) = - 1,200 Hence, 12BQ = 4,800. So, BQ for R = 400 units. 2. Budgeted Mix between R and S = 400 : 400, i.e. 1: 1 3. Sales Mix Variance for R and S = Col.(2) - Col. (3) = (RAQ × BP) - (AQ × BP) = Rs. 450 F Let AQ of Product S be Q units. Hence Total AQ = (R + S) = (500 + Q)

Rewriting in budgeted mix (1:1), RAQ for R and S are each and respectively.

Since Col.(2) - Col. (3) is 450F, we have, [ ×12 + ×15] - (500×12 + Q×15) = -450

Upon simplifying, we have, 6,750 + 13.5Q - 6,000 - 15Q = -450 On solving the above, 1.5Q = 1,200 or Q = 800 units. Hence, AQ for S = 800 units. 4. Revised Actual Quantity = 500 + 800 = 1,300 units re-written in the ratio 1: 1, i.e. 650

units each for R and S. 5. Variance Computation Chart Particulars Col. (1): BQ × BP Col. (2): RAQ × BPCol. (3): AQ × BP Col. (4): AQ × APProduct R (WN 1) 400 units ×

Rs. 12 = Rs. 4,800 (WN 4) 650 units × Rs. 12 = Rs. 7,800

(given) 500 units × Rs. 12 = Rs. 6,000

(given) 500 units ×Rs. 15 = Rs. 7500

Product S (given) 400 units × Rs. 15 = Rs. 6,000

(WN 4) 650 units ×Rs. 15 = Rs. 9,750

(WN 3) 800 units × Rs. 15 = Rs. 12,000

(WN 3) 800 units ×Rs. 20 = Rs. 16,000

Total Rs. 10,800 Rs. 17,550 Rs. 18,000 Rs. 23,500 Answer: Particulars Product R Product S Standard Sales Quantity (units) 400 units (WN 1) 400 units(given)Actual Sales Quantity (units) 500 units (given) 800 units (WN

3) Standard Price per unit Rs. 12 (given) Rs. 15 (given)Actual Price per unit Rs. 15 (given) Rs. 20 (given)Sales Price Variance = Col.(3) - Col. (4) Rs. 1,500 F Rs. 4,000 F Sales Volume Variance = Col.(1) - Col. (3) Rs. 1,200 F Rs. 6,000 F Sales Value Variance = Col.(1) - Col. (4) Rs. 2,700 F Rs. 10,000 F

Question: 13 Compute the missing data, indicated by question marks from the following : Particulars Product A Product BStandard price per unit (Rs.) 24 30Actual price per unit (Rs.) 30 40Standard input (kg) 50 ??Actual input (kg) ?? 70Material price variance ?? ??Material usages variance (Rs.) ?? 600 (A)Material Cost Variance ?? ??

Material Mix variance for both products together was Rs. 90 adverse.

Solution:

1. Let SQ for Product B = Q units. Material Usage Variance for B = (SQ × SP) - (AQ × SP) = (Q× 30) - (70 × 30) = Rs. 600A. On solving, 30Q = 1500. Hence, Q = 50. Therefore, SQ for Product B = 50 Kg. 2. SQ for Product A = 50 Kg. SQ for Product B = 50 Kg (as computed above). Hence, Std Mix is 1:1.

3. Let AQ of Product A be K Kg. Total AQ = (K + 70) units. Since Standard mix is 1:1, RAQ of A and B are each and respectively.

It is given that Material Mix Variance = (RAQ × SP) - (AQ × SP) = Rs. 90A

On substituting, we have, [ × 24 + × 30] - [(K×24) + (70×30)] = - 90

Upon simplifying, we have, 12K + 840 + 15K + 1050 - 24K - 2100 = -90. On solving the above, 3K = 120 or K = 40 units. Hence, AQ for A = 40 Kg. 4. Total AQ = 40 + 70 = 110 units. Rewriting 110 units in the ratio 1:1, RAQ for A and B is 55 units each. 5. Variance Computation Chart (Note: Quantities in Kg, Prices and Cost in Rs.) Particulars SQ × SP RAQ × SP AQ × SP AQ × AP

(1) (2) (3) (4) Product A Product B

(given) 50 × 24 = 1200 (WN 1) 50 × 30 = 1500

(WN 4) 55 × 24 = 1320 (WN 4) 55 × 30 = 1650

(WN 3) 40 × 24 = 960 (given) 70 × 30 = 2100

(WN 3) 40 × 30 =1200 (given)70 ×40 = 2800

Total Rs. 2,700 Rs. 2,970 Rs. 3,060 Rs. 4,000

Material Yield Variance = Rs. 2,700 - Rs. 2,970 = Rs. 270 A

+ Material Mix Variance = Rs. 2,970 - Rs. 3,060 = Rs. 90 A

+ Material PriceVariance = Rs. 3,060 -Rs. 4,000 = Rs. 940 A

Material Usage Variance = Rs. 2,700 - Rs. 3,060 = Rs. 360 A+

Material PriceVariance b/fd asabove = Rs. 940 A

Total Material Cost Variance = Rs. 2,700 - Rs.

4,000 = Rs. 1,300 A

Note: All Prices SP & AP are given in the question. SQ for A and AQ for B is also available in the question. Material-wise Breakup of Variances: Particulars Product A Product B Total (a) Yield Variance = Col.(1) - Col. (2) Rs. 120 A Rs. 150 A Rs. 270 A (b) Mix Variance = Col.(2) - Col. (3) Rs. 360 F Rs. 450 A Rs. 90 A (c) Usage Variance (a+b) = Col.(1) - Col. (3)Rs. 240 F Rs. 600 A Rs. 360 A (d) Price Variance = Col.(3) - Col. (4) Rs. 240 A Rs. 700 A Rs. 940 A (e) Total Material Cost Variance (c+d)= Col.(1) - Col. (4)

Nil Rs. 1,300 A Rs. 1,300 A

Question: 14 - ADDITIONAL QUESTIONS FOR PRACTICE Worldwide LTD. is engaged in marketing of wide range of consumer goods. M, N, O and P are the zonal sales officers for your zones. The company fixes annual sales target for them individually. You are furnished with the following: 1. The standard costs of sales target in respect of M, N, O and P are Rs 5,00,000, Rs

3,75,000, Rs 4,00,000 and Rs 4,25,000 respectively. 2. M, N, O and P respectively earned Rs 29,900, Rs 23,500, Rs 24,500 and Rs 25,800

as commission at 5% on actual sales effected by them during the previous year. 3. The relevant variances as computed by a qualified cost accountant are as follows : Particulars

M(Rs)

N(Rs)

O (Rs)

P(Rs)

Sales Price Variance 4,000 (F) 6,000 (A) 5,000 (A) 2,000 (A)Sales Volume Variance 6,000 (A) 26,000 (F) 15,000 (F) 8,000 (F)Sales Margin Mix Variance 14,000 (A) 8,000 (F) 17,000 (F) 3,000 (A)

Note: (A) = Adverse variance and (F) = Favourable variance You are required to: Compute the amount of sales target fixed and the actual amount of contribution earned in case of each of the zonal sales officer. Evaluate the overall performance of these zonal sales officers taking three relevant base factors and then recommend whose performance is the best.

Solution: (in Rs.)

Particulars A B C D Total 1. Commission Earned 29,900 23,500 24,500 25,800 1,03,7002. Commission Rate 5% 5% 5% 5% 3. Actual Sales (1-4-2) 5,98,000 4,70,000 4,90,000 5,16,000 20,74,0004. Sales Price Variance (4,000) 6,000 5,000 2,000 9,0005. Sales Volume Variance 6,000 (26,000) (15,000) (8,000) (43,000)6. Standard / Target Sales [3 ± 4 ± 5]

6,00,000 4,50,000 4,80,000 5,10,000 20,40,000

7. Less: Standard Costs of Target

5,00,000 3,75,000 4,00,000 4,25,000 17,00,000

8. Standard Contribution [6 - 7]1,00,000 75,000 80,000 85,000 3,40,0009. Sales Margin Price Variance 4,000 (6,000) (5,000) (2,000) (9,000)

(=SPV) 10. Sales Margin Mix Variance (14,000) 8,000 17,000 (3,000) 8,00011. Actual Contribution [8 ± 9 ± 10]

90,000 77,000 92,000 80,000 3,39,000

12. Standard Contribution Rate [8 ÷ 6]

16.67% 16.67% 16.67% 16.67%

13. Actual Contribution Rate [11 ÷ 3]

15.05% 16.38% 18.78% 15.50%

14. Standard Cost of Actual Sales [3 × (100% - 16.67%)]

4,98,333 3,91,667 4,08,333 4,30,000 17,28,333

15. Actual Cost Incurred (3-11) 5,08,000 3,93,000 3,98,000 4,36,000 17,35,00016. Cost Variance (14 - 15) 9,667A 1,333A 10,333F 6,000A 6,667A17. Salesmen Evaluation: (a) Whether Sales Target met? No Yes Yes Yes (comparing 3 & 6) - Rank obtained

No Rank I Rank II Rank III Rank

(b) Whether Std Contribution earned?

No Yes Yes No

(comparing 11 & 8) - Rank obtained

No Rank II Rank I Rank No Rank

(c) Whether Contribution Rate met?

No No Yes No

(comparing 12 & 13) - Rank obtained

No Rank No Rank I Rank No Rank

(d) Whether Cost Reduction achieved?

No No Yes No

(based on 16) - Rank obtained No Rank No Rank I Rank No Rank Decision: The Performance of Sales Officer C can be considered the best of the above. Note: Since Sales Margin Quantity Variance (SMQV) is not given in the question, Sales Margin Mix Variance (SMMV) is taken as the total effect of Sales Margin Volume Variance (SMW). Also, since only Standard Sales are specified, Quantity Variance does not arise.

Question: 15 (Standard Costing + Marginal Costing) A company following standard marginal costing system has the following interim trading statement for the quarter ending 30th June, 2013, which reveals a loss of Rs 17,000, detailed below: RsSales 4,99,200

Closing Stock (at prime cost) 18,000Direct Material 1,68,000Direct Labour 1,05,000Variable Overhead 42,000Fixed Overhead 1,20,000Fixed Administration Overhead 40,000Variable Distribution Overhead 19,200Fixed Selling Overhead 40,000Loss 17,000

Additional information is as follows: (i) Sales for the quarter were 1,200 units. Production was 1,400 units, of which 100

units were scrapped after complete manufacture. The factory capacity is estimated at 2,000 units.

(ii) Because of low production, labour efficiency during the quarter is estimated to be 20% below normal level.

You are required to analyse the above and report to the management giving the reasons for the loss.

Solution:

1. Analysis of the Profit and Loss Account to compute Standards Particulars Total Standards Per Unit Sales Rs. 4,99,200Rs. 4,99,200 ÷ 1,200 units = Rs. 416Less: Cost of Production: Materials Rs. 1,68,000 Rs. 1,68,000 ÷ 1,400 units = Rs. 120 Labour Cost (at 20% below normal

level) Rs. 1,05,000 (Rs. 1,05,000 × 80%) ÷ 1,400 units

= Rs. 60 VOH(at 20% below normal

efficiency) Rs. 42,000 (Rs. 42,000 × 80%) ÷ 1,400 units =

Rs. 24 Less: Closing Stock (120 + 60) ×

100 units (Rs. 18,000) (see Note)

Gross Contribution Rs. 2,02,200Rs. 212Less: Variable Distribution OH Rs. 19,200 Rs. 19,200 ÷ 1,200 units = Rs. 16 Net Contribution Rs. 1,83,000 Rs. 196Less; Fixed Costs (1,20,000 + 40,000 +

40,000) Rs. 2,00,000

Loss (Rs. 17,000) 1

Note: Production 1,400 units - Sales 1,200 units - Scrapped 100 units = 100 units 2. Assumptions / Working Notes in analyzing Variances

(a) Sales Variances: Budgeted Capacity = 2,000 units is taken as Budgeted Sales Quantity. Also, it is assumed that Budgeted Sale Price = Actual Sale Price = Rs. 416 per unit. • Sales Price Variance = Nil. • Sales Volume Variance (Effect on Contribution) = (2,000 units - 1,200 units) × Rs. 196 = Rs. 1,56,800A. (b) Material Cost Variances: In the absence of information, Material Cost Variances = Nil. (c) Labour Cost Variances: (i) Labour Rate Variance = Nil. (ii) Labour Efficiency Variance = Rs. 1,05,000 × 20% Efficiency Loss = Rs. 21,000A. (d) Variable OH Cost Variances: (i) VOH Expenditure Variance = Nil. (ii) VOH Efficiency Variance = Rs. 42,000 × 20% Efficiency Loss = Rs. 8,400A. (e) FOH Cost Variances: In the absence of information, FOH Cost Variances = Nil. (f) Effect of Abnormal Loss: Variable Cost of Output scrapped after complete manufacture = (Rs. 120 + Rs. 60 + Rs. 24) = Rs. 204 × 100 units = Rs. 20,4Q0A. (g) Stock Valuation Effect: Since Marginal Costing System in use, the inventories are to be carried at total variable cost. However, since the Company has valued its inventories on Prime Cost basis, i.e. excluding VOH, to that extent, profits will be under-stated. Hence, effect of VOH not included in Stock Valuation = Rs. 24 × 100 units = Rs. 2,400A. 3. Explanation of factors causing Loss during the period Particulars Rs. Budgeted Contribution for 2,000 units at

Rs. 196 Rs. 3,92,000

Less: Budgeted Fixed Costs (1,20,000 + 40,000 + 40,000)

Rs. 2,00,000

Budgeted Profit 1,92,000Less: Effect of Variances Sales Volume Variance Rs. 1,56,800 A Labour Efficiency Variance Rs. 21,000 A VOH Efficiency Variance Rs. 8,400 A Abnormal Loss / Scrap Rs. 20,400 A Stock Valuation Difference Rs. 2,400 A (2,09,000) Loss for the period (17,000)Alternative treatment: In the above calculations, Labour Efficiency has been taken to have an impact on VOH, i.e. time related OH also. If such impact is not considered in VOH, Standard Contribution per unit will be Rs. 196 (instead of Rs. 190). All calculations will stand modified accordingly.

Question: 16 (Miscellanies) SOLID Company manufactures a product, whose Standard Cost is as under- Direct Materials - 5 units at Rs3 Direct Labour - 5 hours at Rs 5 Production Overheads - 5 hours at Rs 4

Rs 15 Rs 25 Rs 20

Profit Margin is at 25% on Sale Price. Budgeted Sales for the period is Rs 39,200. For a period, the actual sales were Rs 35,000 while actual Material and Labour Cost were Rs 8,000 and Rs 12,000 respectively. The analysis of variances for this period is as follows – Direct Materials Price Usage Direct Labour Rate Efficiency Production OH Expenditure Volume

Rs 800 A--

Rs 300 ARs 200 A

-

-Rs 405 FRs 975 F

--

Rs 340 FAssume that there is no change in stock and that there are no other overheads. You are required to compute the following from the above details – Actual Production Actual Profit Actual Hours worked Budgeted Hours

Production Overhead Efficiency Variance Production Overhead Capacity Variance Sales Price Variance Sales Volume Profit Variance

Also, prepare a Reconciliation Statement between Budgeted and Actual Profit.

Solution:

1. Sales Variances Col. (1): BQ × BP Col. (2): AQ × BP Col. (3): AQ × AP BQ= bal.fig, BP = WN(b) 490 units ×Rs. 80=Rs. 39,200 (given)

AQ from Materials Col.1, BP =WN(b) 507 units × Rs. 80 = Rs.40,560

AQ from Materials Col.1,AP=bal.fig 507 uts ×Rs.69.03 =Rs. 35,000 (given)

Volume Variance = Rs. 39,200 - Rs. 40,560 = Rs. 1,360 F + Price Variance = Rs. 40,560 - Rs.

35,000 = Rs. 5,560 A

Total Sales Variance = SW Rs. 1,360 F + SPV Rs. 5,560 A

= Rs. 4,200 A

Notes: (a) Profit = 25% on Sale Price = 1/4th on Sales = 1/3rd on Cost = 1/3rd on (Rs. 15 + Rs. 25 + Rs. 20) = Rs. 20 per unit.

(b) Selling Price = Cost + Profit = Rs. 60 + Rs. 20 = Rs. 80 per unit. 2. Material Variances Col. (1): SQ × SP Col. (2): AQ × SP Col. (3): AQ × AP AO = bal.fig, SP=given (507 units) × 5) × Rs. 3 = Rs. 7,605 (i.e. Col.2 Rs. 7,200 less MUV Rs. 405 F)

AQ = bal.fig, SP=given 2,400 units × Rs. 3 = Rs. 7,200 (i.e. Actual Cost Rs. 8,000 less MPV Rs. 800 A)

AQ from Col. 2, AP = bal.fig. 2,400 units×Rs. |3.33|= Rs. 8,000 (given)

Usage Variance (given) = Rs. 405 F + Price Variance (given) = Rs. 800 A

Total Material Cost Variance (given) = MUV Rs. 405 F + MPV

Rs. 800 A = Rs. 395 A

3. Labour Variances Col. (1): SH × SR Col. (2): AH × SR Col. (3): AH × AR AO = from Matls Col.1, SR =given (507 units × 5 hrs) × Rs.5 ph = Rs. 12,675

AH = bal.fig, SR=given. 2,595 hrs × Rs. 5 = Rs. 12,975 (i.e. Actual Cost Rs. 12,000 + LRV Rs. 975 F)

AH from Col.2, AR =bal.fig 2,595 hrs × Rs.4.62 = Rs. 12,000 (given)

Efficiency Variance (given) = Rs. 300 A + Rate Variance (given) = Rs. 975 F

Total Labour Cost Variance (given) = Rs. 300 A + Rs. 975

F = Rs. 675 F

4. FOH Variances: Since Production OH Volume Variance is stated in the question, POH is fixed in nature. (Note: Expenditure Variance is common to VOH and FOH. However, Volume Variance is applicable for FOH only.) Col. (1): AO × SR Col. (2): AH × SR Col.(3):BFOH = BO

× SRCol. (4): AFOH

AO from Materials, SR = given 507 units × Rs. 20 = Rs. 10,140

AH from Labour, SR = given 2,595 hrs × Rs. 4 = Rs. 10,380

BO from Sales, SR = given 490 units × Rs. 20 = Rs. 9,800

Rs. 10,000 (i.e.BFOH Rs.9,800+Exp. Var.Rs.200 A

Efficiency Variance = Rs. 10,140-Rs. 10,380 = 200 A +

Capacity Variance = Rs. 10,380 - Rs. 9,800 = Rs. 580 F

+ Expenditure Variance(given) = Rs. 200 A

Total FOH Cost Variance = Rs. 200 A + Rs. 580 F + Rs.

200 A = Rs. 140 F

Answers: 1. Actual Production = 507 units 5. Production OH Efficiency Variance = Rs. 240A2. Actual Profit = Sales - Cost = Rs.

5,000 6. Production OH Capacity Variance = Rs. 580F

(35,000 - 8,000 - 12,000 - 10,000) 7. Sales Price Variance = SPV = SMPV = Rs.5,560A

3. Actual Hours worked = 2,595 hours8. Sales Volume Profit Variance = SMW = SW ×NP Ratio = 1,360

4. Budgeted Hours = 490 × 5 = 2,450 hours

× 25% = Rs. 340F

5. Operating Statement / Reconciliation Statement (in Rs.): (any one Approach may be adopted in exams) Particulars Marginal Costing

ApproachAbsorption CostingApproach

1. Budgeted Profit 4,900 units × Rs. 20 = 9,800

4,900 units × Rs. 20 =9,800

2. Sales Volume Variance Effect on Profit

1,360 F × PVR 50% = 680 1,360 F × NP Ratio 25% =340

3. Net Balance (1 ± 2) 10,480 Standard Profit = 10,1404. Sales Price Variance (5,560) (5,560)5.+/- - Effect of Cost Variances Material Variances Usage 405 405 Price (800) (800) Labour Variances Efficiency (300) (300) Rate 975 975 FOH Variances Efficiency NA (240) Capacity NA 580 Expenditure (200) (200)6. Actual Profit (3 ± 4 ± 5) 5,000 5,000

Note: PVR =

= = 50%, NP Ratio = (given) 25%

Question-17 (Miscellanies) The following profit reconciliation statement has been prepared by the Cost Accountant of RSQ Ltd. for March, 2012:

Budget Profit 2,40,000Sales Price Variance 51,000 (F)Sales Volume Profit Variance 42,000 (A)Material Price Variance 15,880 (A)Material Usage Variance 3,200 (F)Labour Rate Variance 78,400 (F)Labour Efficiency Variance 32,000 (A)Variable Overhead Expenditure Variance 8,000 (F)Variable Overhead Efficiency Variance 12,000 (A)Fixed Overhead Volume Variance 1,96,000 (A)Fixed Overhead Expenditure Variance 4,000 (F)Actual Profit 86,720

Budgeted production and sales volumes for March, 2012 were equal and the level of finished goods stock was unchanged, but the stock of raw materials decreased by 6,400 kg (valued at standard price) during the month. The standard cost card is as under: Rs.Material 4 kg @ Rs 2.00 8.00Labour 4 hours @ Rs 32.00 128.00Variable Overhead 4 hours @ Rs 12.00 48.00Fixed Overheads 4 hours @ Rs 28.00 112.00Standard Cost 296.00Standard Profit 24.00Standard Selling Price 320.00

You are required to calculate: (i) Actual quantity of material purchased (ii) Actual production and sales volume (iii) Actual number of hours worked (iv) Actual variable and fixed overhead cost incurred.

Solution:

COMPUTATION OF REQUIREMENTS Actual Production & Sales Volume Fixed Overhead Volume Variance = Standard Fixed Overhead Rate per Unit × (Actual Output – Budgeted Output*) Rs 1,96,000 (A) = Rs 112 × (Actual Output – 10,000 units) Actual Output = 8,250 units *Budgeted Output = Budgeted Profit Budgeted Profit per unit

= Rs 2, 40,000 Rs 24 Alternative = 10,000 units Sales Margin Volume Variance = Standard Margin – Budgeted Margin = Budgeted Margin × Actual Qty. – Budgeted Margin × Budgeted Qty. Or = Budgeted Margin × (Actual Qty. – Budgeted Qty.) Rs 42,000(A) = Rs 24 × (Actual Qty. – 10,000 units) Actual Qty. = 8,250 units Actual Quantity of Material Purchased Material Usage Variance = Standard Cost of Standard Quantity for Actual Output – Standard Cost of Actual Quantity = Standard Qty. × Standard Price – Actual Qty. × Standard Price Or = Standard Price × (Standard Qty. – Actual Qty.) Rs 3,200 (F) = Rs 2 × (8,250 units × 4 Kg – Actual Qty.) Actual Qty. = 31,400 Kg. Actual Quantity Purchased = Actual Qty. Consumed – Decrease in Stock = 31,400 Kg. – 6,400 Kg. = 25,000 Kg. Actual Hours Worked Labour Efficiency Variance = Standard Cost of Standard Time for Actual Output – Standard Cost for Actual Time = Standard Hours × Standard Rate – Actual Hours × Standard Rate Or = Standard Rate × (Standard Hours – Actual Hours) Rs 32,000 (A) = Rs 32 × (8,250 units × 4 Hrs. – Actual Hours) Actual Hours = 34,000 Hrs. Actual Fixed Overhead and Actual Variable Overhead Incurred Variable Overhead Cost Variance = Standard Variable Overheads for Production – Actual Variable Overheads Or = (Standard Variable Overhead Rate per unit × Actual Production in Units) – (Actual Variable

Overheads) Rs 8,000 (F) + Rs 12,000 (A) = Rs 48 × 8,250 units – Actual Variable Overheads Actual Variable Overheads = Rs 4,00,000 Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed Overheads Or = (Standard Fixed Overhead Rate per Unit × Actual Production in units) – (Actual Fixed Overheads) Rs 4,000 (F) + Rs 1,96,000 (A) = Rs112 × 8,250 units – Actual Variable Overheads Actual Fixed Overheads = Rs11,16,000