Answers to Session 8 Questions

Multiple Choice Answers

8.1 d

8.2 c

8.3 d

Actual hours at standard rate per hour = 110,200 x £10/hour = £1,102,000

Standard hours for actual production = 29,000x4 hrs/unit x £10/hr = £1,160,000

Labour efficiency variance = £58,000 Fav

Exercises: Answers

Q 8.1

a)

BUDGET £’000
Sales 125,000 @ average £135 16,875
Direct materials 125,000 @ £70/unit 8,750
Direct labour 5,000 hours @ £40/hour 200
Electricity 125,000 @ £1 125
Rent of factory £2,000 + 10% 2,200
Depreciation on plant £500,000 @ 15% 75
Gross profit 32.7% (£44.20 per unit) 5,525
Administration salaries 1,700
Selling expenses 12% of sales value 2,025
Operating profit 10.7% 1,800

b)

PREVIOUS YEAR £’000

Sales 115,000 @ average £125 14,375
Direct materials 115,000 @ £65/unit 7,475
Direct labour 4,600 hours @ £38/hour 175
Electricity 115,000 @ £1 115
Rent of factory 2,000
Depreciation on plant 70
Gross profit 31.6% (£39.48 per unit) 4,540
Administration salaries 1,700
Selling expenses 12% of sales value 1,725
Operating profit 7.8% 1,115
Q 8.2

a.

Budget Flexed Actual Variance

Budget
Production and sales 10,000 units 11,000 units 11,000 units N/A
quantity
£ £ £ £
Sales revenue 100,000 110,000 121,000 11,000

Direct materials 20,000 22,000 22,000 -

Direct labour 40,000 44,000 46,000 (2,000)
Fixed costs 10,000 10,000 12,500 (2,500)
Total costs 70,000 76,000 80,500 4,500
Profit 30,000 34,000 40,500 6,500

b. and c. Variances and reasons:

Sales volume:

Flexed budgeted profit £34,000

Budgeted profit £30,000
Sales volume variance £4,000 Favourable

Possible reasons:
- performance of sales staff
- market conditions

Sales price variance:

Actual sales revenue £121,000

Actual quantity at standard price £110,000
Sales price variance £11,000 Favourable

Possible reasons:
- improved product quality
- performance of sales staff
- market conditions
Direct materials price variance:

Actual material cost £22,000

Actual usage at standard cost £20,000
Direct materials price variance £2,000 Adverse

Possible reasons:
- improved quality of raw materials
- price increase due to material shortages
- poor purchasing performance

Direct materials usage variance:

Actual usage at standard cost £20,000

Standard usage for actual production £22,000
Direct materials usage variance £2,000 Favourable

Possible reasons:
- improved quality of raw materials
- improved performance of production staff leading to less wastage
- more reliable production machinery than was anticipated

Direct labour rate variance:

Actual labour cost £46,000

Actual hours at standard rate £48,000
Direct labour rate variance £2,000 Favourable

Possible reasons:
- use of less skilled staff than was planned
- good performance by personnel department
- change in labour market conditions

Direct labour efficiency variance:

Actual hours at standard cost £48,000

Standard hours for actual production £44,000
Direct labour efficiency variance £4,000 Adverse

Possible reasons:
- poor supervision
- use of lower skilled staff
Fixed overhead spending variance:

Actual cost £12,500

Budgeted cost £10,000
Fixed overhead spending variance £2,500 Adverse

Possible reasons:
- poor management of fixed overheads
- increase in overhead spend not anticipated in budget (eg extra advertising?)

c. Reconciliation of budgeted to actual profit

Budgeted profit £30,000

Add favourable variances:

Sales volume £4,000
Sales price £11,000
Direct materials usage £2,000
Direct labour rate £2,000
£19,000

Less adverse variances:

Direct materials price (£2,000)
Direct labour efficiency (£4,000)
Fixed overhead spending (£2,500)
(£8,500)

Actual profit £40,500

Exam Style Question
a)
Budget Flexed Actual Variance
Budget
100000 105000 105000

Sales Revenue 2000000 2100000 2047500 -52500

Costs:
Direct Materials 580000 609000 630000 -21000

Direct Labour 350000 367500 420000 -52500

Fixed overheads 600000 600000 520000 80000

Total
cost 1530000 1576500 1570000 6500

Profit 470000 523500 477500 -59000

b) £ £
Budgeted profit 470000

Sales volume variance 53500 Favourable

Budgeted profit for actual volume 523500

Add: Favourable variances

Raw material price 39900

Direct labour rate 21000
Fixed overhead spending 80000
140900
Less: Adverse variances

Sales price -52500

Raw material
usage -60900
Direct labour efficiency -73500
-186900

Actual profit 477500

c)
Sales volume variance
Impact on contribution of volume being different from planned

Reasons: sales team performance, market forces, change in price etc

Raw material price variance

Difference between actual cost of materials and actual qty at budgeted
price

Reasons: purchasing performance, cheaper/lower quality materials

Direct labour rate variance

Difference between actual cost of labour and actual hours at budgeted rate

Reasons: lower wage increase than planned, different mix of labour with greater use
of
cheaper/less skilled workers

Fixed overhead spending

Difference between actual fixed overhead and
planned

Reasons: cost control, reduction in advertising/marketing/training etc

Sales price variance

Difference between actual sales revenue and actual qty at budgeted price

Reasons: planned strategy to increase market share, market forces

Raw material usage

variance
Cost of using more/less materials than should have been required given actual
volume
measured at budgeted price.

Reasons: cheaper materials/lower quality, more waste, problems with processes

less skilled/poorly trained workers

Direct labour efficiency variance

Cost of using more/less labour hours than should have been required given actual volume
measured at budgeted price.

Reasons: cheaper materials/lower quality, more waste, problems with processes

less skilled/poorly trained workers
d)
Improvements could include:

Inclusion of non financial performance information

Inclusion of %'s to indicate significance of variances

Specifically identify if variances are favourable or adverse

Needs Year To Date information

Needs a commentary

Needs latest forecast v full year budget

Use of colour