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Fundamentals Of The Cost Benefit Accounting

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Questions:

1. Calculate the following variance:
  1. Direct materials price and quantity (Efficiency) variances
  2. Direct labour rate and efficiency variances
  3. Variable overhead spending and efficiency variances
  4. Fixed overhead spending and production volume variances

2. Discuss your results and provide Rafael with recommendations on whether some of the variances should be investigated further.

 

Answers:

Answer 1

Answer i:

Direct Materials Price and Quantity (Efficiency) Variances

Materials

 

Actual price

4.6

Standard Price

4.5

Quantity Purchased

25000

Material Price Variance

2500

Material Quantity (Efficiency) Variance

 

Actual Quantity Used for Actual Output

23100

Standard Quantity allowed for Actual Output

25000

Standard Price

4.5

Material Quantity (Efficiency) Variance

-8550

Working Notes

Material Price Variance

= (4.6 – 4.5) = 0.1

= 25,000 x 0.1 = 2500

Material Quantity Variance

= 23100 – 25000 = (1900)

= (1900) x Standard price

Or (1900) x 4.5 = (8550)

Answer ii:

Direct Labour Rate and Efficiency Variances

Labour

 

Labour Rate Variance

 

Actual Labour Price Per hour

14.6

Standard labour price per hour

15

Actual Hours use

40100

Labour Rate Variance

-16040

Labour Efficiency Variance

 

Actual Hours for actual output

40100

Standard hours for actual output

40000

Standard Price

4.5

Labour Efficiency Variance

450

Working Notes:

Labour Variance

Actual labour price per hour – Standard Labour price per hour

= 14.6 – 15 = (0.4)

= (0.4) x Actual Hours Used

Or (0.4) x 40100 = (16040)

Labour efficiency variance:

Actual hours for actual output – Standard hours for actual output x Standard Price

= (40100 – 40000) x 4.5

= 450

 

Answer iii:

Variable Overhead Spending and Efficiency Variance:

Variable Overhead

 

Variable Overhead Spending Variance

 

Actual Variable Overhead Costs

119000

Standard variable overhead rate

3

Actual volume of allocation base

25000

 

44000

Variable Overhead Efficiency Variance

 

Actual volume of allocation base

23100

Standard Volume  of allocation base for output

25000

Standard variable overhead rate

3

Variable Overhead Efficiency Variance

-5700

Working Notes

Variable overhead spending variance:

Actual variable overhead costs – (Standard variable overhead rate x actual volume of allocation base)

= 119000 – (3 x 25000)

= 44,000

 Variable overhead efficiency variance

Actual volume of allocation base – Standard volume of allocation base x Standard variable overhead rate

= 23100 – 25000 x 3 = (5700)

Answer to iv:

Fixed Overhead Spending and Production Volume Variance

Fixed Overhead

 

Fixed overhead spending variance

 

Actual Fixed overhead costs

180000

Estimated fixed overhead costs

160000

Fixed overhead spending variance

20000

Fixed overhead volume variance

 

Estimated volume of allocation base

8000

standard volume of allocation base for output

7800

standard fixed overhead allocation rate

20

Fixed overhead volume variance

4000

Working Notes

Fixed overhead spending variance

= Actual Fixed overhead cost – Estimated fixed overhead costs

= 180,000 – 160,000

= 20,000

Fixed overhead volume variance

Estimated volume of allocation base – Standard volume of allocation base for output x standard fixed overhead allocation rate

= (8000 – 7800) x 20

= 4,000

Answer 2:

As evident from the current situation the material price variance reflected a favourable situation as the material price variance stood 2500. The material quantity efficiency variance reported an unfavourable efficiency variance -8550. Under the labour variance the labour rate variance stood -16040. While the labour efficiency variance favourably stood 450. The variable quantity overhead stood 44000 for the year while the variance overhead efficiency variance stood unfavourably to (5700). The fixed overhead spending variance stood favourably to 20000 while the fixed overhead volume variance stood 4000.

As evident from the above stated computations an assertion can be bought forward by stating that the material quantity variance for the company stood negatively which significantly requires an effort to be understand the cause of unfavourable amount of actual quantity that was used on the actual output. It can be stated that there were also the instances of labour rate variance as the variance stood negatively to 16040. The company is required to look into the primary reason for the such cause of unfavourable variances and investigate unfavourable situation to take into the account the causes of variance.  Additionally, the variable overhead efficiency variance stood negatively to -5700 therefore it is recommended that the variances should be invested further by Rafael to understand the major cause of such deviation.

 

Reference List:

Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Lanen, W., 2016. Fundamentals of cost accounting. McGraw-Hill Higher Education.  

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