ACCA F2 Management Accounting - 2010 - Study text

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Chapter 12: Standard costing and variance analysis

Example

A company uses standard absorption costing. It manufactures a single product,

which has a standard full production cost of $20 per unit. This consists of $12 of

standard variable costs and $8 per unit of fixed production costs.

During a financial period, the company made 25,000 units of the product and sold

23,000 units. The actual reported profit for the period, using standard absorption

costing, was $55,000.

If standard marginal costing had been used, the reported profit would have been

different.

 There was an increase in inventory of 2,000 units. When finished goods

inventory increases, the reported profit with absorption costing is higher than

with marginal costing.

 The difference in profit is the amount of fixed overhead in the increase (or

reduction) in inventory. In this example, this is $16,000 (= 2,000 units × $8).

 Reported profit would therefore be $16,000 lower using standard marginal

costing – i.e. the reported profit would be $39,000 (= $55,000 - $16,000).

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Calculating actual costs or standard costs from variances

 Calculating actual cost from variances and standard cost

 Calculating standard cost from variances and actual cost

11 Calculating actual costs or standard costs from

variances

In your examination, you might be given a question where you are required to:

 calculate actual costs, given information about variances and standard costs, or

 calculate a standard cost, given information about variances and actual costs.

This type of problem does not occur in practice, but it is a useful way of testing

knowledge of variances.

11.1 Calculating actual cost from variances and standard cost

This type of problem can be solved by using the tables to calculate variances,

described in this chapter. You can enter into a table all the data given by the

question. The ‘missing figure’ for actual cost or standard cost can then be calculated.

Some examples will be used to illustrate the technique.

Example

The standard direct materials cost of making Product B is $20, consisting of 4 kilos

of material at $5 per kilo. During one period, 1,250 kilos of the material were

purchased and the direct materials price variance was $250 (A).

Required

Calculate the actual costs of direct materials purchased and used in the period.

Answer

A table should be prepared showing how the total materials cost variance is

calculated, and the figures that are available should be entered in the table.

1,250 kilos of material should cost (× $5) 6,250

The materials did cost ?

Total materials cost variance 250

(A)

Actual purchase costs were higher than standard cost because the price variance is

adverse. Actual purchase costs were therefore $6,250 + $250 = $6,500.

Chapter 12: Standard costing and variance analysis

Example

The standard direct material cost of Product C is $21 (6 kilos of material at $3.50 per

kilo). During a period when 400 units of Product C were made, the direct material

usage variance was $630 (F).

Required

Calculate the actual quantity of direct materials used in the period.

Answer

A table should be prepared showing how the materials usage variance is

calculated, and the figures that are available should be entered in the table.

Materials usage variance

kilos

400 units of Product C should use (× 6 kilos)

2,400

They did use ?

Material usage variance in kilos ?

Standard price per kilo $3.50

Material usage variance in $ $630 (F)

From this information we can calculate the material usage variance in kilos. A

usage variance is valued at the standard cost per unit of material; therefore the

usage variance in $ can be converted into a usage variance in kilos:

Usage variance = $630(F)/$3.50 per kilo = 180 kilos (F).

The variance is favourable, which means that actual usage was less than the

standard (expected) usage. We know that the standard usage is 2,400 kilos.

Actual material usage was therefore:

2,400 kilos – 180 kilos = 2,220 kilos.

Example

In the standard cost of Product D, the cost of Grade A labour is $24 per unit (= 1.5

hours per unit at $16 per hour). During a month when 500 units of Product D were

made and 780 hours were worked, the labour rate variance for Grade A labour was

$1,500 (F).

Required

Calculate the actual cost of Grade A labour in the month.

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Answer

A table should be prepared showing how the labour rate variance is calculated,

and the figures that are available should be entered in the table.

Direct labour rate variance

780 hours should cost (× $16)

12,480

They did cost ?

Direct labour rate variance 1,500

(F)

The rate variance was favourable, which means that actual costs were less than

standard.

Actual cost of Grade A labour = $12,480 – $1,500 = $10,980.

Example

In a standard absorption costing system, the standard fixed production overhead

cost per unit of Product E is $36. This represents 3 direct hours at $12 per hour.

The budgeted production volume in the period was 6,000 units of Product E. The

fixed production overhead volume variance was $12,600 (F).

Required

Calculate the actual quantity of Product E that was produced.

Answer

A table should be prepared showing how the production overhead volume

variance is calculated, and the figures that are available should be entered in the

table.

Fixed overhead volume variance

units of production

Budgeted production volume in units 6,000

Actual production volume in units ?

Fixed overhead volume variance in units ?

(F)

Standard fixed production overhead cost per unit $36

Fixed overhead volume variance in $ $12,600

(F)

We know the volume variance in $. The volume variance is valued at the standard

fixed overhead cost per unit. The volume variance in $ can therefore be converted

into a volume variance in units as follows:

$12,600(F)/$36 per unit = 350 units (F).

Actual production volume is higher than the budgeted volume, because the volume

variance is favourable. The budgeted production volume was 6,000 units.

Actual production volume = 6,000 units + 350 units = 6,350 units.

Chapter 12: Standard costing and variance analysis

11.2 Calculating standard cost from variances and actual cost

The same approach can be used to calculate a standard cost or budget amount if you

are given a variance and data about actual costs (or sales revenues). Some further

examples will illustrate the technique.

Example

Product F uses a direct material, material M. The standard price of material M is $4

per kilo. During one month, 2,500 units of Product F were manufactured. These

required 12,000 kilos of material M and the material usage variance was $2,000 (A).

Required

Calculate the standard direct material cost per unit of Product F.

Answer

We know the standard price of material M, but we need to calculate the standard

material usage. This can be obtained from the data provided. A table should be

prepared showing how the material usage variance is calculated, and the figures

that are available should be entered in the table.

Materials usage variance

kilos

2,500 units of Product F should use ?

They did use 12,000

Material usage variance in kilos ?

Standard price per kilo $4

Material usage variance in $ 2,000 (A)

We know the material usage variance in $. The variance is valued at the standard

price per unit of material. From the information provided we can therefore calculate

the material usage variance in kilos:

Usage variance = $2,000(A)/$4 per kilo = 500 kilos (A).

The variance is adverse, which means that actual usage was more than the standard

(expected) usage. The standard material usage is therefore:

12,000 kilos – 500 kilos = 11,500 kilos.

This is the standard usage for 2,500 units of Product F, so the standard usage per

unit is 11,500/2,500 = 4.60 kilos per unit.

The standard material cost for Product F is therefore:

4.6 kilos of material M at $4 per kilo = $18.40.

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Example

The standard time required to make one unit of Product G is 1.25 hours of direct

labour. During one month, total direct labour costs were $119,000. The company

made 6,800 units of Product G. These took 9,100 direct labour hours and the direct

labour rate variance was $8,400 (F).

Required

Calculate the standard direct labour cost per unit of Product G.

Answer

We know the standard direct labour time, which is 1.25 hours per unit, but we

need to calculate the standard direct labour rate per hour. This can be obtained

from the data provided. A table should be prepared showing how the labour rate

variance is calculated, and the figures that are available should be entered in the

table.

Direct labour rate variance

9,100 hours should cost ?

They did cost 119,000

Direct labour rate variance 8,400

(F)

The rate variance is favourable, which means that actual costs were lower than

standard costs. The actual labour cost for the 9,100 hours was $119,000. Expected

costs are higher.

The 9,100 hours should therefore cost $119,000 + $8,400 = $127,400.

The standard rate per hour is $127,400/9,100 hours = $14 per hour.

The standard direct labour cost of Product G is:

1.25 hours at $14 per hour = $17.50

Tutorial note

It is easy to get confused about whether variances should be added or subtracted in

this type of calculation. You need to think carefully and logically, to avoid making a

mistake.

Exercise 7

A company makes a single product. The standard direct labour cost of one unit of

the product is $24 (= 1.5 hours at $16 per hour).

During a month when 900 units of the product were manufactured, 1,240 hours

were worked and the direct labour rate variance was $1,700 (F).

Required

Calculate actual cost of direct labour during the month.

Chapter 12: Standard costing and variance analysis

Exercise 8

During one month, a factory produced 3,200 units of Product H and these took 5,150

direct labour hours. The standard direct labour rate per hour is $18 per unit, and the

direct labour efficiency variance for the month was $8,100 (F).

Required

Calculate the standard direct labour cost per unit of Product H.

Practice multiple choice questions

1 A company uses standard costing. Last month 18,000 direct labour hours were

worked at an actual cost of $328,500. The production output measured in standard

hours was 17,700 standard hours. The standard direct labour cost per hour was

$18.50.

What was the direct labour rate variance?

A $1,050 (A)

B $1,050 (F)

C $4,500 (A)

D $4,500 (F).

(2 marks)

2 A company uses standard costing. It makes a single product, and it should take 2

direct labour hours to make each unit. Last month 18,000 direct labour hours were

worked at an actual cost of $18 per hour. Actual output measured was 8,800 units of

product. The standard direct labour cost per hour is $18.50.

What was the direct labour efficiency variance?

A $7,200 (A)

B $7,200 (F)

C $7,400 (A)

D $7,400 (F).

(2 marks)

3 A company uses standard marginal costing. Last month, the budgeted sales were

6,000 units. The standard sales price is $15 per unit and the contribution to sales

ratio is 80%. Actual sales in the month were 6,450 units and total sales revenue was

$92,880.

What were the adverse sales price and favourable sales volume contribution

variances?

Sales price Sales volume contribution

$ $

A 1,800 5,400

B 3,870 5,400

C 1,800 6,750

D 3,870 6,750

(2 marks)

Paper F2: Management Accounting

4 A company uses standard marginal costing. Last month, actual fixed overhead

expenditure was 3% below budget and the fixed overhead expenditure variance

was $2,400.

What was the actual fixed overhead expenditure last month?

A $155,200

B $159,856

C $160,000

D $164,800

(2 marks)

5 A company uses standard absorption costing. The following data relates to the

previous costing period.

Budget Actual

Sales and production (units) 1,500 1,600

Standard

Actual

$ $

Selling price per unit 48 46

Total production cost per unit 34 33

What was the favourable sales volume profit variance for the period?

A $1,200

B $1,300

C $1,400

D $1,500

(2 marks)

6 Who should a materials price variance be reported to?

A Factory department manager

B Senior buying manager

C Human resources department manager

(1 mark)

7 A company manufactures a single product. The standard material cost of the

product is 0.5 kilos of direct material at $8 per kilo. During last month 20,000 units

of the product were made and these used 10,500 kilos of material. Purchases and

usage of materials were the same quantity and purchases cost $82,500.

What was the direct materials price variance for the month?

A $1,500 (F)

B $1,500 (A)

C $2,500 (F)

D $2,500

(A) (2 marks)

Chapter 12: Standard costing and variance analysis

8 A company uses standard absorption costing. It manufactures a single product and

the standard fixed production cost is $36 per unit, consisting of 3 hours per unit at a

fixed overhead rate of $12 per hour. The following data relates to the previous

costing period.

Budget Actual

Sales and production (units) 35,000 36,000

The fixed overhead capacity variance for the month was $7,200 favourable.

How many hours were worked in the month?

A 104,400

B 105,600

C 107,400

D 108,600

(2 marks)

Paper F2: Management Accounting

ACCA F2 Management Accounting - 2010 - Study text - Emile Woolf Publishing

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