VARIANCE ANALYSIS: ILLUSTRATION The following information relates to the production of product Alpha for the month of August Standard Cost Card Budgeted production overhead based on 10,000 units $ $ Selling Price $300.00 Standard cost Materials: 5 kilograms $12.00/kg $60.00 Labour: 4 hours $10.00/hour $40.00 Variable overheads: 4 hours $8.00/hour $32.00 Fixed overheads $28.00 $160.00 Standard profit $140.00 Actual Data Actual materials used 52,800 kg Actual Materials cost $595,200 Actual production output 9,600 units Actual wage cost $475,200 Actual variable cost $288,000 Actual time worked and paid for 43,200 hours Actual fixed costs $290,000 Actual SP per unit $310 Actual sales 9,600 units Required Calculate for the month of August as many variances as the information permits and prepare an operating statement reconciling actual and standard profit. 1
SOLUTION MATERIAL VARIANCES TOTAL MATERIAL COST VARIANCE Actual cost of materials purchased 595.2 Standard quantity of materials for actual activity (kg) Actual production level standard material cost per unit 576.0 TOTAL COST VARIANCE -19.2 Price Variance Actual cost of materials purchased 595.2 Standard cost of materials purchased (Standard price actual quantity purchased) 633.6 Material price variance 38.4 Usage Variance Actual quantity of materials used (kg) 52,800 Standard quantity of materials for actual quantity (kg) (Standard quantity actual production level) 48,000 Valued at standard price per kg $12.00 Material usage variance -57.6 LABOUR VARIANCES TOTAL LABOUR COST VARIANCE Actual wage costs 475.2 Standard time worked for actual production (hrs) (Standard time actual production level) 384.0 TOTAL COST VARIANCE -91.2 2
Rate variance Actual wage costs 475.2 Standard wage costs (Standard rate actual hours attended) 432.0 Labour rate variance -43.2 Efficiency Variance Actual hours worked (hours) 43,200 (Standard time actual production level) 38,400 Valued at standard price per hour $10.00 Labour efficiency variance -48.0 VARIABLE OVERHEAD VARIANCES TOTAL VARIABLE OVERHEAD COST VARIANCE Actual variable overhead costs 288.0 (Standard time actual production level) 307.2 TOTAL COST VARIANCE 19.2 Expenditure variance Actual variable overhead costs 288.0 Standard variable overhead costs (Standard rate actual hours attended) 345.6 57.6 Efficiency variance Actual hours worked (hours) 43,200 (Standard time actual production level) 38,400 3
Valued at standard price per hour $8.00 Variable efficiency variance -38.4 FIXED OVERHEAD VARIANCES TOTAL FIXED OVERHEAD COST VARIANCE Actual fixed overhead costs 290.0 Standard fixed overhead applied for actual production (units) (Standard fixed cost actual production level) 268.8 TOTAL COST VARIANCE -21.2 Expenditure variance Actual fixed overhead costs 290.0 Budgeted fixed overhead costs 280.0 Volume variance -10.0 Actual production output (units) 9,600 Budgeted production output (units) 10,000-400 Valued at standard rate per unit $28.00 Fixed overhead volume variance -$11.20 SALES VARIANCES Price variance Actual sales revenue 2,976.0 Expected sales revenue (Standard selling price actual sales volume) 2,880.0 Sales price variance 96.0 Volume variance Actual sales volume (units) 9,600.00 Budgeted sales volume (units) 4
10,000.00-400.00 Valued at standard profit per unit $140.00 Sales volume variance -56.0 Operating Statement for the month of August 2010 $000s Budgeted profit 1,400.0 Sales volume variance -56.0 Standard profit on actual sales 1,344.0 Sales price variance 96.0 F A Cost variances Material A - price 38.4 - usage 57.6 Direct labour - rate 43.2 - efficiency 48.0 Variable overheads - expenditure 57.6 - efficiency 38.4 Fixed overhead - expenditure 10.0 - volume 11.2 - efficiency 0.0 Sub total 96.0 208.4 Net variances -112.4 Actual profit 1,327.6 Actual profit for August Sales: 9,600 units $310 2,976.0 Less: actual costs Material 595.2 Direct labour 475.2 Variable overheads 288.0 Fixed overhead 290.0 1,648.4 Total 1327.6 5