Question 4 Farmseeds

Tutorial help and key points

Part (a) is fairly a simple variance question requiring your basic understanding
in developing variance formulae, (keeping in mind S for standard and A for
actual results) and all numbers should work out from the formulae. Then you
must convert budgeted contribution to actual simply by adding favourable
variances to budgeted contribution and deducting any adverse ones. Make sure
you only show fixed overheads expenditure variance under marginal costing
approach.
In part (b) you have to explain the variances calculated in part (a) simply
relating to the company details, make sure you discuss it briefly as only 6 marks
are allocated and there will be quite a few variances. So do not run over the
time scale.
Marking scheme
(a)

Budgeted contribution
Sales price
Sales volume contribution:
Price
Usage
Rate
Efficiency
Idle time variance
Rate or Expenditure
Efficiency
Actual contribution
Less: Budgeted fixed costs
Adjustment of fixed OH expenditure variance
Actual profit

(1
(1
(1
(1
(1
(1
(1
(1
(1
(1
(1
(1
(1
(1

mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
mark)
(Total 14 marks)

(b)

Performance measurement

2 marks each for three valid assessments

discussed/max 6
(Total 6 marks)
TOTAL = 20 marks

(a)
Operating statement
$
(8,400 units x $50) 420,000

Budgeted contribution
Adjustment of sales variances:
Sales price
Sales volume contribution:
Budgeted contribution at actual sales

120,000 A
20,000 A
280,000

Adjustment of cost variance:

Direct Materials Variances:
Price
Usage

60,000 F
0

Direct Labour Variances:

Rate
Efficiency
Idle time variance

18,960 A
20,000 F
15,600 F

Variable Overheads variances:

Rate or Expenditure:
Efficiency
Actual contribution
Less: Budgeted fixed costs
Adjustment of fixed OH expenditure variance
Actual profit

30,000 A
30,000 F
356,640
(210,000)
10,000 F
156,640

Workings: Variances:
Sales price: Revenues
Actual Revenues
Variance

$
should have been

$240 x 8,000 tonnes

Sales volume contribution:

(Budget volume actual volume) x Standard contribution
Direct Materials Variances:
Price
should have spent $60 x 12,000 tonnes
Actual cost was
Usage
Actual usage

should have used

1.5 tonnes x 8,000 t

x Standard price $60

Direct Labour Variances:

Rate

should have cost

1,920,000
1,800,000
120,000 A
$20,000 A
720,000
660,000
60,000 F
12,000 t*
12,000 t
0
0

$18 x 15,800 hours paid 284,400

actual paid

Efficiency
hours
Have actually worked

303,360
$
18,960 A
should have worked 2 hours x 8,000 tonnes

16,000hrs

15,000hrs
Variance x standard rate of $18/0.9 per hour 20,000 F

Excess Idle time variance Budgeted idle time actual idle time)
X standard rate per hour
(1,580 800) x $20

15,600 F

Variable Overheads variances:

Rate or Expenditure :
Have actually incurred

should have incurred 15,000 hrs x $30

Efficiency
Actually worked for

should have worked for

16,000 hrs
15,000 hrs
At standard rate $30 per hour

Fixed Overheads expenditure variance

Budgeted fixed overheads
Actual fixed overheads

450,000
480,000
30,000 A

30,000 F
210,000
200,000
10,000F

t* stands for tonnes

(b)
From the results in part (a) it is apparent that FS has had a poor performance over the
period and actual profit achieved was only $156,640 as compared with budgeted profit
figure of $210,000. This can be explained as below considering all the factors involved.
Sales
Both sales price and sales volume variances were adverse by $120,000 and $20,000
respectively, which shows that despite reducing the selling prices, sales demand could not
be boosted up. It might be due to general economic downfall, or due to product quality
being poor, or poor marketing. Sales area was the main concern in profits being down from
the budgeted figures.
Direct materials
Price variance is favourable and usage is nil, which reflects a positive performance from the
purchasing and production side, they controlled the cost by buying from right sources and
producing within budget parameters of wastage. Overall it improved the profits.

Direct Labour
Labour rate variance shows an adverse result, which is due to the company paying higher
rate than expected, and right results were achieved in efficiency and cutting down idle time.
Overall it improved the profits.
Variable overheads
Overall the variance is nil. The rate variance is adverse like labour rate, reflecting general
rise in cost of resources in the society, where as efficiency variance is favourable showing
better internal controls in production process.
Fixed overheads
Fixed overheads were $10,000 more than budgeted, again reflecting a rise in general costs
in the economy, like variable overheads and labour.