Management Accounting 2 nd Year Solutions

Management Accounting 2 nd Year Solutions August 2016 Exam Paper, Solutions & Examiners Comments Page 1 of 25

NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2016. Page 2 of 25

Accounting Technicians Ireland 2 nd Year Examination: Autumn 2016 Paper: MANAGEMENT ACCOUNTING Monday 15 August 2016 2.30 p.m. to 5.30 p.m. INSTRUCTIONS TO CANDIDATES In this examination paper the / symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B. If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labelled, as appropriate, e.g. / s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. Note: Examinees are permitted to use terminology of either International Accounting Standards (I.A.S s) or Financial Reporting Standards (F.R.S s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements. Page 3 of 25

SECTION A ANSWER ALL THREE QUESTIONS QUESTION 1 (Compulsory) Peafield plc. manufactures two products, PQ and YZ and both are produced from the same material and labour. They currently use machine hours as a basis for absorbing production overheads. The company is now considering implementing an activity based costing system. The management accountant has supplied the following information for the two products for the last year. PQ YZ Data per unit / / Sales price 30 45 Direct material cost 12 15 Direct labour cost 10 12 Direct material usage (kg) 4.0 6.0 Direct labour hours 1.2 1.8 Machine hours 1.5 2.4 Activities per annum Number of production set ups 22 32 Number of purchase orders 195 85 Number of inspections 60 40 Number of designs 20 25 Production and sales volumes (units) 45,000 75,000 The annual production overheads were as follows: / Machine set up costs 270,000 Deign costs 135,000 Machine maintenance costs 195,000 Ordering costs 140,000 Quality control 151,000 Total overhead cost 891,000 Required: a) Calculate the full cost and profit per unit for products PQ and YZ using Peafield plc s current method of absorbing production overheads. 6 Marks b) Calculate the full cost and profit per unit for each product using activity based costing. 10 Marks c) Advise Peafield plc. of four benefits that arise as a result of the implementation of an activity based costing system. 4 Marks Total: 20 Marks Page 4 of 25

QUESTION 2 (Compulsory) Gardner Ltd. budgets to sell three products and has provided you with the following selling prices and variable costs: Product Sales Units Selling price per unit / Variable cost per unit / Bit 800,000 12 7 Bob 1,000,000 11 6 Bolt 1,100,000 8 4 Annual fixed costs are budgeted at / 8,000,000. Required: (a) Calculate the total budgeted profit. (b) Calculate the contribution / sales ratio for each product. (c) Calculate the total breakeven sales volume and sales revenue. 3 Marks 3 Marks 5 Marks (d) How many units of each product and in total would Gardner Ltd need to sell to earn a total profit of / 4,200,000? 4 Marks (e) Management are deciding whether or not to spend an extra / 300,000 on the advertising of Product Bolt. It is considering reducing its selling price to 90% of the current price which will result in an increase in sales of 30%. Advise whether or not it is financially worthwhile spending / 300,000 on the advertising. 5 Marks Total 20 Marks Page 5 of 25

QUESTION 3 (Compulsory) McNulty plc. manufactures three products, X1, Y2 and Z3, of which unit costs, machine hours and selling prices are as follows: X1 Y2 Z3 / / / Selling price per unit 42.0 32.5 37.0 Direct materials at / 2.00 per kg 14.0 12.0 10.0 Direct wages at / 2.50 per hour 12.5 7.5 10.0 Variable overheads 5.0 3.0 4.0 Variable cost per unit 31.5 22.5 24.0 Fixed cost per unit 8.0 8.5 6.0 Profit per unit 2.5 1.5 7.0 Sales demand for the period is limited as follows. Units Product X1 6,000 Product Y2 8,000 Product Z3 9,000 The production manager of McNulty plc. has informed the management accountant that the supply of labour and machine capacity in any period is unlimited. However materials will be in short supply as a result of some suppliers ceasing to trade due to the recession. McNulty plc. can only source 114,000kg materials. Required: a) Assuming there is no limiting factor, calculate the maximum achievable contribution. 4 Marks b) Given the constraint advised by the production manager, indicate the production levels that should be adopted for the three products in order to maximise contribution and state the maximum contribution achievable in the period. 12 Marks c) Advise the management accountant of four ways that may help to overcome the direct material constraint that exists within McNulty plc. 4 Marks Total: 20 Marks Page 6 of 25

QUESTION 4 SECTION B ANSWER TWO OUT OF THE FOLLOWING THREE QUESTIONS The budgeting process is an important feature of effective management performance. Required: a) Outline and briefly explain five benefits of budgeting. b) Provide a brief overview of the budgeting process. c) Explain each of the following approaches to budgeting; (i) Activity based budgeting; (ii) Zero based budgeting; (iii) Rolling budgets. 5 Marks 6 Marks 9 Marks Total 20 Marks Page 7 of 25

QUESTION 5 Thornfield plc. manufactures sand products in its forming department. Thornfield plc. operate a process costing system. All direct materials are added at the beginning of the process, and conversion costs are added evenly during the process. The management accountant of Thornfield plc. has provided you with the following summary data for December. Units Direct Labour Overheads Materials / / / Materials added 10,000 Completed during the month 9,000 Normal loss 8% of input Total costs 1,360,000 1,284,000 1,172,000 Scrap value of the normal loss is / 55 per unit. There is no opening or closing stock of work-in-progress in December. Required: a) Prepare for the month of December: (i) the process account; (ii) the normal loss (scrap) account; (iii) the abnormal loss/abnormal gain account. b) Explain the terms: (i) Normal loss; (ii) Abnormal loss; (iii) Abnormal gain; (iv) Equivalent units. 12 Marks 8 Marks Total 20 Marks Page 8 of 25

QUESTION 6 The following information relates to product Jupiter, produced by Brierfield plc. during January. This represents the information that remains after a fire in the premises destroyed most of the accounting records. Variances / Selling price 50,000A Materials price 28,500 F Materials usage 7,500 A Labour rate 18,700 F Labour efficiency 20,400A Actual data Sales (25,000 units at / 10) 250,000 Materials costs (112,500 kg at / 1.20) 135,000 Labour costs (75,000 hrs at / 1.9) 142,500 There was no opening or closing inventories Required: a) Calculate the following; (i) Standard selling price per unit; (ii) Standard cost of material per kilogram; (iii) Standard kilograms of materials required per unit; (iv) Standard labour rate per hour; (v) Standard hours of labour required per unit. 2 Marks 2 Marks 2 Marks 2 Marks 2 Marks b) Prepare the standard cost card per unit of product Jupiter. 4 Marks c) Outline two possible reasons for each of the sales, material and labour variances produced by Brierfield plc. above. 6 Marks Total: 20 Marks Page 9 of 25

2 nd Year Examination: August 2016 Management Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No. 1 2 3 4 5 6 Average Mark 47% 30% 42% 70% 47% 55% (%) Nos. Attempting 192 196 183 129 110 141 Statistical Analysis - Overall Pass Rate 43% Average Mark 46% Range of Marks Nos. of Students 0-39 78 40-49 33 50-59 39 60-69 27 70 and over 19 Total No. Sitting Exam 196 Total Absent 247 Total Approved Absent 14 Total No. Applied for Exam 51 Page 10 of 25

General Comments: GENERAL COMMENTS ON THE PAPER AS A WHOLE This paper was divided into two sections A and B each consisting of three questions. All three questions in section A were compulsory and candidates had a choice of two from three questions from section B. All of the questions carried 20 marks each. Five out of the six questions were mainly computational with some narrative elements whilst question 4 was all narrative. Overall, I am very disappointed with the performance of candidates sitting this paper. There was evidence of rote learning and it was clear that many candidates were not prepared for the questions which were examined. The majority of scripts were very badly presented. There is no excuse for the standard of answers presented at this sitting. All of the areas examined are covered in the study text, past exam papers and sample papers and they should not have created any difficulty. In many cases there was no evidence of workings. Candidates presented a final figure rather than showing the workings which lead to this figure. If this final figure is not correct then valuable marks are lost for workings. Furthermore, candidates should be aware that marks are awarded if the principle is correct even if the incorrect figures are used. In order to answer some parts of a question the solution to a previous part is required. If the figures carried forward are incorrect marks will not be lost if the principle is correct. The candidate will not be penalised twice, so it is important that all parts of a question are attempted. Page 11 of 25

Examiners Comments on Question One This question was compulsory and tested the candidate s knowledge traditional and absorption costing. Part (a) required candidates to calculate the cost per unit of two products using the traditional method of absorption costing. Candidates demonstrated a poor command of the traditional method of accounting. Many candidates were unable to calculate the overhead absorption rate per machine hour. Others did calculate the overhead absorption rate per hour correctly but failed to then convert it to a cost per unit. Part (b) required candidates to calculate the cost per unit of each product using an activity based costing approach. This part of the question was exceptionally well answered in the vast majority of cases. Part (c) required candidates to discuss four benefits that arise as a result of the implementation of an activity based costing system. The answers to this part of the question were mixed with some candidates not attempting this part. SOLUTION 1 a) PQ YZ / / Selling price 30.00 45.00 Direct material 12.00 15.00 Direct labour 10.00 12.00 Overhead (working 1) 5.40 8.64 Total cost 27.40 35.64 Profit 2.60 9.36 6 Marks b) PQ YZ / / Selling price 30.00 45.00 Direct material 12.00 15.00 Direct labour 10.00 12.00 Overhead (working 2) 9.14 6.40 Total cost 31.14 33.40 Profit/(loss) (1.14) 11.60 10 Marks c) Four potential benefits from implementing an activity based costing system 1. Improves the accuracy of the cost of a product/service. The overhead 2. is allocated according to the activity that caused it to occur. It is based on a cause-and-effect relationship rather than based on an arbitrary measure. 3. Costs are firstly divided into cost pools and then allocated to the product using cost drivers. Management are more aware of how costs arise using this method. 4. ABC can aid the identification of non- value added activities. 5. ABC makes waste more visible. Page 12 of 25

(Other reasonable benefits also acceptable) Working 1 Machine Hours hrs PQ 45,000 units x 1.5 hrs = 67,500 YZ 75,000 units x 2.4 hrs = 180,000 247,500 Total overhead / 891,000 Overhead absorption rate / 891,000 / 247,500 machine hours = / 3.60 per machine hour 4 Marks PQ 1.5 Machine hours x / 3.60 = / 5.40 YZ 2.4 Machine hours x / 3.60 = / 8.64 Working 2 Cost pool Cost driver PQ YZ / / / / Machine set up 270,000 54 set ups 5,000 per set up 110,000 160,000 Design costs 135,000 45 designs 3,000 per design 60,000 75,000 Machine maintenance 195,000 247,500 MH 0.788 per MH 53,190 141,810 Ordering costs 140,000 280 orders 500 per order 97,500 42,500 Quality control 151,000 100 inspections 1,510 per inspection 90,600 60,400 Total 891,000 411,290 479,710 Total units 45,000 75,000 Overhead per unit 9.14 6.40 4 Marks Total: 20 Marks Page 13 of 25

Examiners Comments on Question Two This question was compulsory and tested the candidate s knowledge of cost volume profit analysis. Parts (a) to (d) required calculations of total budgeted profit, contribution to sales ratio, breakeven sales volume and sales revenue and activity required to produce a certain profit. The answers were very disappointing as many candidates demonstrated a complete lack of understanding of the concepts underlying CVP analysis. Part (e) required candidates to decide if it was financially worthwhile for the company to spend an extra 300,000 on advertising. Many candidates did not attempt this part and those that attempted it displayed a very poor understanding of what the question actually asked. SOLUTION 2 (a) Total budgeted profit Bit Bob Bolt / / / Selling Price 12 11 8 Variable Cost 7 6 4 Contribution per unit 5 5 4 Total contribution 4m 5m 4.40m / m Total Contribution 13.40 Fixed Cost 8.00 Profit 5.40 (b) Contribution /sales ratio Bit Bob Bolt C/S % 5/12 = 41.7% 5/11 = 45.45% 4/8 = 50% 3 Marks (c) Breakeven total sales volume 3 Marks Weighted average CPU = / 13.4m / 2.9m units = / 4.62 per unit BEP = Fixed cost / Weighted average CPU = / 8m / / 4.62 = 1,731,602 units Breakeven total sales revenue Average sales price: Bit Bob Bolt Total Selling Price / 12 11 8 Sales units 800,000 1,000,000 1,100,000 2,900,000 Total sales / 9,600,000 11,000,000 8,800,000 29,400,000 Page 14 of 25

Average sales price / 10.137 Breakeven total sales revenue = 1,731,602 x / 10.137 = / 17,553,249 (d) 5 Marks Total (Fixed Cost + Target Profit) / Weighted average CPU ( / 8 million + / 4.20 million) / / 4.62 = 2,640,693 units Per product Bit 2,640,693 x 800/2,900 = 728,467 Bob 2,640,693 x 1,000/2,900 = 910,584 Bolt 2,640,693 x 1,100/2,900 = 1,001,642 2,640,693 4 Marks (e) / m Existing Contribution (1,100,000 x 4) 4.400 Revised Contribution (1,430,000 x 3.2) 4,576 Increase in Contribution 0.176 Therefore spending the extra 300,000 on advertising is not financially worthwhile. 5 Marks Total: 20 Marks Page 15 of 25

Examiners Comments on Question Three This question was compulsory and tested the candidate s knowledge of limiting factors. This question required the calculation of the total contribution for three products, maximum contribution achievable when there is a constrained resource and listing four ways to overcome a labour constraint. Part (a) of the question required the calculation of total contribution for three products and this part of the question was answered quite well. Part (b) required the calculation of the maximum contribution achievable when materials were limiting. This part of the question was very poorly answered. Students failed to identify the limiting factor and for those that did identify it they were unable to rank the products according to the highest contribution per limiting factor. Many ranked them according to the highest contribution per unit. In order to answer this type of question there are four steps. Many answers did not follow those steps with the result that candidates ended up with no format which caused them confusion and many answers were unfinished. I was surprised at the number of candidates that multiplied the kg of materials per unit by the contribution per unit rather than dividing which meant that the rankings were incorrect. However marks were awarded because the principle was correct. Part (c) required candidates to list four ways to overcome labour constraints and this part of the question was answered very well. SOLUTION 3 a) / Product X1 6,000 x / 10.50 63,000 Product Y2 8,000 x / 10 80,000 Product Z3 9,000 x / 13 117,000 Total contribution 260,000 b) 4 Marks X1 Y2 Z3 CPU ( / ) 10.50 10.00 13.00 Kg material per unit 7 6 5 Contribution per kg ( / ) 1.50 1.67 2.60 Rank 3 2 1 Kg Total kgs available Total kgs required 114,000 Page 16 of 25

Product X1 6,000 x 7kg 42,000 Product Y2 8,000 x 6kg 48,000 Product Z3 9,000 x 5kg 45,000 135,000 Production Plan Production Kg units Product Z3 9,000 9,000 x 5 kg per unit 45,000 Product Y2 8,000 8,000 x 6 kg per unit 48,000 Product X1 3,000 3,000 x 7 kg per unit 21,000 20,000 114,000 12 Marks Contribution / Product X1 3,000 units x / 10.50 31,500 Product Y2 8,000 units x / 10.00 80,000 Product Z3 9,000 units x / 13.00 117,000 228,500 c) 1. That part of the production that cannot be carried out in-house due to the constraint could be subcontracted out. 2. A different type of material may be used as a substitute, without compromising quality. 3. Check if the materials may be sourced internationally. 4. Productivity could be improved by eliminating waste in order to reduce the kg required per unit. (Note: Other reasonable suggestions are acceptable) 4 Marks Total: 20 Marks Page 17 of 25

Examiners Comments on Question Four This question was optional and tested the candidate s knowledge of budgeting. It required candidates to give a brief overview of the budgeting process and to explain certain budgeting terms. Part (a) of the question required candidates to demonstrate their knowledge of the benefits of budgeting and this part of the question was answered very well. Part (b) required candidates to demonstrate their knowledge of the budgeting process and again was well answered. Many candidates listed the points directly from the study text whilst others used practical examples rather than word for word from the study text. Both answers scored highly. Part (c) required an explanation of Activity based budgeting, Zero Based Budgeting and Rolling Budgets. Some candidates confused rolling budgets and incremental budgets but otherwise this part of the question was well answered. SOLUTION 4 a) There are many advantages to using budgets. The use of budgets: provide a method of allocating and using resources within the organisation help to monitor and control operations promote forward thinking show employees an overall picture of the direction of the organisation which can motivate staff help to co-ordinate different departments and align them towards shared objectives provide a framework for delegation. (Note: Other reasonable suggestions are acceptable) 5 Marks b) The budgeting process normally follows a set structure as follows; Form a budget committee Establish a budget administration system Set the budget period Set budget guidelines Prepare initial budgets Negotiate, review and approve Budget revision Page 18 of 25

(each needs to be briefly explained to get marks) 6 Marks c) (i) Activity Based Budgeting is a method of budgeting in which the activities that incur costs in every functional area of an organisation are recorded and their relationships are defined and analyzed. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices. (ii) Zero based budgeting is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified. (iii) A rolling budget is one that is revised at regular intervals by adding a new budget period to the full budget as each budget period expires. A budget for one year, for example, could have a new quarter added to it as each quarter expires. In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a continuous basis. Advantages of rolling budgets: The budgeting process should be more accurate Much better information upon which to appraise the performance of management The budget will be much more relevant by the end of the traditional budgeting period Disadvantages of rolling budgets: More costly and time consuming An increase in budgeting work may lead to less control of the actual results 9 Marks Total 20 Marks Page 19 of 25

Examiners Comments on Question Five This question was optional and tested the candidate s knowledge of process costing. This is the first time that process costing has been examined in detail. Part (a) required candidates to prepare the process account, the normal loss account and the abnormal loss/gain account. Many candidates displayed an understanding of the process account but very few produced the normal and abnormal loss/gain account correctly. Part (b) required candidates to explain four terms associated with process costing and this part was answered very well. SOLUTION 5 a) (i) Process Account UNITS / UNITS / Materials 10,000 1,360,000 Normal loss 800 44,000 Labour 1,284,000 Output 9,000 3,690,000 Overhead 1,172,000 Abnormal loss 200 82,000 Unit Reconciliation units Input 10,000 Normal loss (8%) 800 Expected Output 9,200 Actual Output 9,000 Abnormal Loss 200 Cost per unit = Cost of Production less scrap value of normal loss Expected Output / (3,816,000-44,000)/9,200 = 410 Valued as follows: Actual output: 9,000 x 410 = 3,690,000 Abnormal loss: 200 x 410 = 82,000 10,000 3,816,000 10,000 3,816,000 Scrap value of normal loss: 800 units x / 55 = / 44,000 (ii) Normal loss Account (Scrap Account) Page 20 of 25

UNITS / UNITS / Process Account 800 44,000 Bank 1,000 55,000 Abnormal loss 200 11,000 1,000 55,000 1,000 55,000 Scrap Value for Abnormal Loss: 200 units x / 55 = / 11,00 (iii) Abnormal loss Account UNITS / UNITS / Process Account 200 82,000 Normal loss Account 200 11,000 Statement of P/L and OCI 71,000 200 82,000 200 82,000 12 Marks b) (i) Normal loss A normal loss is a loss whose occurrence is inevitable. It is a loss that occurs each time an activity is carried out. (ii) Abnormal loss An abnormal loss is a loss whose occurrence can be avoided. It is a loss that does not occur each time an activity takes place. It occurs when the actual loss is higher than the normal loss. (iii) Abnormal gain This is a gain that occurs when the actual loss is lower than the normal loss. (iv) Equivalent units In order to calculate the cost of production the number of units produced is required together with the cost of materials, labour and overhead costs. The output will consist of fully completed units together with partially completed units. Those partially completed units will be mathematically converted to the equivalent of full units of production. E.g. 1,000units that are 80% complete is the equivalent of 800 fully completed units. 8 Marks Total 20 Marks Page 21 of 25

Examiners Comments on Question Six This question was optional and tested the candidate s knowledge of standard costing and variance analysis. Candidates were required to work backwards from variances to standard cost. Part (a) of the question required candidates to prepare a standard cost sheet for a product. This area of the syllabus is still creating problems. The standard of answers has not improved over the past few years. Part (b) of the question required candidates to outline one possible reason for each of the sales, material and labour variances. This part of the question was answered well even by candidates who did not demonstrate a competency in answering part (a). SOLUTION 6 Sales price per unit Sales price variance / 25,000 units should have brought in (25,000 x S) 25,000S 25,000 units did bring in 250,000 Variance 50,000A / 25,000 units should have brought in (25,000 x S) 300,000 25,000 units did bring in 250,000 Variance 50,000A Therefore 25,000 x S = / 300,000 S = / 300,000/25,000 = / 12 Cost per kg of material Material price variance / 112,500 kg should have cost (112,500 x C) 112,500C 112,500 kg did cost 135,000 Variance 28,500F / 112,500 kg should have cost 163,500 (BF) 112,500 kg did cost 135,000 Variance 28,500F Page 22 of 25

Therefore 112,500 x Cost = / 163,500 C = / 163,500/112,500 = / 1.453 Kg material per unit of product Material usage variance Kg 25,000 units should have used (25,000 x Kg) 25,000Kg 25,000 units did use 112,500 5,162A x standard cost per kg / 1.453 Variance / 7,500A 25,000 units should have used (25,000 x Kg) 107,338 25,000 units did use 112,500 5,162A x standard cost per kg / 1.453 Variance / 7,500A Therefore 25,000 x Kg = 107,338 Kg = 107,338/25,000 = 4.29Kg Cost per labour hour Labour rate variance / 75,000 hours should have cost (75,000 x C) 75,000C 75,000 hours did cost 142,500 Variance 18,700F / 75,000 hours should have cost (75,000 x C) 161,200 (Bal. Fig.) 75,000 hours did cost 142,500 Variance 18,700F Therefore 75,000 x Cost = / 161,200 C = / 161,200/75,000 = / 2.15 Labour hours per unit of product Labour efficiency variance Page 23 of 25

Hrs 25,000 units should have used (25,000 x Hrs) 25,000Hrs 25,000 units did use 75,000 x standard cost per kg / 2.15 Variance / 20,400A Hrs 25,000 units should have used (25,000 x Hrs) 65,512 (Bal.Fig.) 25,000 units did use 75,000 x standard cost per kg / 2.150 ( / 20,400/ / 2.15) 9,488A Variance / 20,400A Therefore 25,000 x Hrs = 65,512 Hrs = 65,512/25,000 = 2.62hrs 10 Marks a) Standard cost card per unit / Sales price 12.00 Materials cost 4.29kg @ / 1.453 per kg 6.23 Labour cost 2.62 hours @ / 2.15 per hour 5.63 Contribution 0.14 b) Reasons for the variances 4 Marks Material Variances The business may have sourced cheaper materials of a lower quality for production. Accordingly, these cost less, resulting in the favourable price variance of / 28,500. However, there has been more usage (perhaps more wastage) with an adverse usage variance of / 7,500. Labour Variances The adverse labour efficiency variance of / 20,400 could be attributable to less-skilled or less-experienced staff that have proved to be cheaper to employ, hence the favourable labour rate variance of / 18,700, but have taken longer to do the job. Sales price variance The adverse sales price variance may be due to more competition in the market and due to the original standard being incorrect. 6 Marks Total 20 Marks Page 24 of 25

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