STANDARD COSTING
SECTION 1
Reasons for standard costing and variance analysis
Historic costing is used in financial accounting and statements tend to
be presented at the end of the year, therefore
• corrective action is impossible
• there is no yardstick by which performance can be compared.
This shortcoming of financial accounting has led to the use of standard
costing and variance analysis.
Standard costing and variance analysis make up a predetermined costing
system where
• actual performance is compared with a predetermined performance
so that if differences occur management can take action;
• standard costing compares actual production and sales with planned
production and sales;
• when standards for costing are in operation they are not altered –
unless a flexible budget is used;
• costs are prepared to show the standard cost; actual cost and any
variances, i.e. the difference between the standard or budgeted cost
and the actual cost.
Advantages of standard costing and variance analysis
•
•
•
•
•
Provide a yardstick.
Help determine the price of a product.
Variances can be analysed in detail.
Costing is simplified.
Management is encouraged to plan ahead.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
1
STANDARD COSTING
Types of standard
The main standards are
expected standard – this merges the features of forecasting with
standard setting. Expected standards usually take some account of
delays and inefficiencies. They should, however, be regularly reviewed
as conditions change. This sets realistic standards that both workforce
and management will try to reach.
current standard – for organisations which are faced with rapidly
changing market conditions. Again, such standards take account of
inefficiencies. They should, however, be regularly reviewed as
conditions change.
basic standard – here standards are left unchanged over long periods
of time. It does not take account of changes in current methods of
production, prices or other changing factors. Since frequent changes
are necessary, basic standards are rarely used except as a basis for
preparing current standards.
ideal standard – this is the standard which can be attained under the
most favourable conditions possible. It ignores machine breakdown and
faulty materials, in fact, any waste whatsoever. This level of performance
is seldom reached and is likely to demoralise staff. Perfection is
impossible and for this reason this standard is not recommended.
The setting of a standard cost involves every department and aims to
produce a planned cost related to the product supplied by the
organisation. The detailed planning that goes into producing a standard
cost should make it possible to compare current actual results with the
detailed cost plan. The preparation of the standard costs is typically
based on either the expected standard or the current standard since
these two methods more closely reflect what is happening within an
organisation.
Problems of setting up a standard cost system
When preparing standard costs it is important to consider at what level
of production the business is expected to operate.
• what past performance suggests is capable of attainment – this tends
to lead to management complacency;
2
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
STANDARD COSTING
• what would necessitate maximum efficiency – this tends to be
unrealistic but variances could stimulate management;
• what is possible with normal efficiency.
Standards are set to take account of
•
•
•
•
•
materials – usage, waste, price, output, volume
labour – hours, rate of pay, strikes, output, overtime
variable overheads – expense of power, cleaners
fixed overheads – expense of rent and rates
revenue – prices, quantity sold, profit.
The information which is used to set the standard is collected by both
management and work study personnel who record the relevant
information on a standard cost card. This is used for every activity and it
is to this that management will constantly refer to see if the standard set
is being achieved. The problems associated with standard costing
are:
• No situation is static and in a changing situation the standard can
become unrepresentative. This incurs a cost of constantly updating
data.
• The value of money changes.
• Changes in taxation occur.
• Changes occur in production methods, machinery, labour rates,
efficiency, strikes.
Advantages of setting up a standard cost system
There are several advantages to operating a standard cost system:
• Variances direct management’s attention to areas of difficulty.
• The system assists in pricing the final product.
• Standard costing is an effective method of determining the value of
costs.
• Standard costing gives a constant flow of accounting information to
management without the need to constantly calculate costs.
• The system assists in control by identifying variances.
• Standard costing is part of the budgetary procedure.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
3
STANDARD COSTING
The standard set on the standard cost card can be used for a
considerable period of time.
Only when the variances become constantly favourable or adverse will
standards need to be changed. The standard, when set, will be near the
actual cost but will tend to move as the cost of materials, labour and
overheads changes.
Firms who operate budgetary control have a standard costing system
and so they are able to investigate any divergence from the set target.
The differences between actual results and budgeted expectations are
known as variances.
4
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
COST VARIANCES
SECTION 2
Calculation of variances using a diagram
Cost variances for materials, labour and variable overheads
Variances can be expressed in two ways, either by diagram or formulae.
The use of a diagram for materials, labour and variable overheads makes
it unnecessary to remember the formulae since they can be calculated
directly from the diagram.
The difference between the standard cost and the actual cost creates the
variances, which can be adverse (a) or favourable (f).
It is always possible to decide whether a variance is favourable or
adverse by inspection since favourable variances are below the expected
cost while adverse variances are higher than the expected cost.
When using the diagram it is important to ignore + or – in the
calculation. The price/rate/expenditure variance and the usage/
efficiency variance when added together equal the total cost variance.
The total cost variance for materials, labour and variable overheads
breaks down into two parts.
Total Cost Variance Material Cost Variance
Labour Cost Variance
Variable Overhead Cost Variance
• Price Variance
Price for Materials
Labour Rate for Labour
Expenditure for Variable Overheads
• Usage Variance
Usage for Materials
Efficiency for Labour
Efficiency for Variable Overheads
The diagram is constructed using boxes. These boxes can be used to
calculate all the variances for materials, labour and variable overheads.
The abbreviations used in the diagram are as follows.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
5
COST VARIANCES
AC = Actual Cost
AP = Actual Price
AR = Actual Rate
AQ = Actual Quantity
AH = Actual Hours
SC = Standard Cost
SP = Standard Price
SR = Standard Rate
SQ = Standard Quantity
SH = Standard Hours
The following diagram shows all the variances.
Actual Cost (AP × AQ)
AP/AR
Price Variance
Labour Rate Variance
Expenditure Variance
AQ(SP – AP)
SP/SR
Usage Variance
Efficiency Variance
SP(SQ – AQ)
Standard Cost
(SP × SQ)
SQ/SH
AQ/AH
Reasons for variances
Variances arise for many reasons and can be favourable (showing that
actual performance was better than was budgeted) or adverse (showing
that actual performance was worse than was budgeted). When variances
are favourable, management is operating efficiently; when adverse,
management must investigate to find out why performance is below that
expected.
Materials
Price variances are caused by
•
•
•
•
change in price of materials
change in delivery costs and dates
poor quality material being purchased
loss of discount.
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ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
COST VARIANCES
Usage variances are caused by
•
•
•
•
carelessness/bad handling in use
excessive scrap or waste
pilferage/using non-standard materials
incorrect book-keeping.
Labour
Labour rate variances are caused by
• change in basic wage rates
• poor grade of employee used on the job
• excessive use of overtime.
Efficiency variances are caused by
•
•
•
•
•
incompetent operatives/poor training
poor supervision/inefficient organisation
poor working conditions
delays due to machine breakdown/late deliveries
strikes/go-slows.
Variable overheads
Expenditure variances are caused by
•
•
•
•
change in rent and rates
increases in administrative expenses
change in financial expenses – interest rates
changes in the capital base of the firm.
Efficiency variances are caused by
• use of heat and light
• appropriate use of space
• volume of production, stoppages, strikes.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
7
COST VARIANCES
Example 1
From the following information calculate the variances.
Materials
Standard Price per metre £4
Standard Usage (Quantity) per unit
5 metres
Actual Price per metre £3
Actual Usage (Quantity) per unit
7 metres
Material Cost Variance = (SC – AC) = £20 – £21 = £1(a)
Material Price Variance = AQ(SP – AP) = 7 × £1 = £7(f)
Material Usage Variance = SP(SQ – AQ) = £4 × 2 = £8(a)
The values given in the question can be placed on the diagram and the
variances calculated.
Actual Cost £3 × 7 = £21
AP £3
Price Variance
AQ(SP – AP) £1 × 7 £7(f)
SP £4
Usage Variance
Standard Cost
£4 × 5 = £20
SP(SQ – AQ)
2 × £4 = £8(a)
SQ/SH
8
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
AQ 7m
COST VARIANCES
Example 2
From the following information calculate the variances.
Labour
Standard Cost per unit
Labour 3 hours @ £1.40 per hour
Actual Cost of 10,000 units
Labour 27,000 hours costing £30,000
Labour Cost Variance = (SC – AC) = [(3 × 10,000) × £1.40] – £30,000
= £12,000(f)
Labour Rate Variance = (SR × AH) – AC = £37,800 – £30,000 = £7,800(f)
Labour Efficiency Variance = SR(SH – AH) = £1.4(30,000 – 27,000)
= £4,200(f)
This example does not provide the actual wage rate. However, the use
of the diagram provides the calculation Standard Rate × Actual Hours,
the total of the Standard Cost box and the Labour Efficiency Variance
box. Thus the box system provides a formula that can be used to
calculate the Labour Rate Variance.
The values given in the question can be placed on the diagram and the
variances calculated.
Actual Cost £30,000
Labour Rate Variance
£7,800(f)
SR £1.40
Standard Cost
£42,000
Efficiency Variance
SR(SH – AH) =
£1.40 × 3,000 = £4,200(f)
SH 30,000
AH 27,000
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
9
10
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
STANDARD COSTS AND BUDGETED COSTS
SECTION 3
Standard costs and budgeted costs
Because standard costing is used for both controlling costs and
preparing budgeted final accounts, it is important to include all
overheads so that all costs are planned for. This requires the following
to be taken into account.
Overhead absorption rates
Overheads are usually absorbed on the basis of the budgeted labour
hours and so it is necessary to calculate both the Variable Overhead
Absorption Rate and the Fixed Overhead Absorption Rate so that all
overhead costs are charged to the cost unit. The formula is
• Variable OH Absorption Rate (VOAR) = Variable Budgeted OH/
Budgeted Hours
• Fixed OH Absorption Rate (FOAR) = Fixed Budgeted OH/Budgeted
Hours
Standard hours production
Production is usually expressed in terms of units or £s. However, when
standard costing techniques are used, production can be expressed in
terms common to all types of production – standard hour. This is the
quantity of output or amount of work which should be produced in one
hour. This is particularly useful when examining overheads because the
standard hours production can be compared with the actual hours
production.
• Standard Hours Production (SHP) = Standard Hours × Actual
Production
Variable overhead variances
Unlike fixed overheads there are two ways in which variable overhead
variances can be calculated. The method used depends on the information
given in the question. In both cases the variances are the same.
• Variable Overhead Cost Variance
• Variable Overhead Expenditure Variance
• Variable Overhead Efficiency Variance
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
11
STANDARD COSTS AND BUDGETED COSTS
Method 1
If the information presented in the question gives only actual and
standard information, the variable overhead variances are calculated in
the same way as in material and labour variances.
Example
12,000 units are produced and result in Actual Variable Overheads of
£20,000 for 10,000 hours worked. The Standard Variable Overheads
expected were £1 for each hour worked. Calculate the Variable
Overhead variances.
Actual Cost £20,000
Expenditure Variance
AH(SR – AR) = £10,000(a)
SR £1.00
Standard Cost
£12,000
Efficiency Variance
SR(SH – AH) =
£1.00 × 2,000 = £2,000(f)
SH 12,000
AH 10,000
Answer
Variable Overhead Cost Variance = SC – AC = £12,000 – £20,000 =
£8,000 (a)
Variable Overhead Expenditure Variance = AH(SR – AR) = £10,000 (a)
Variable Overhead Efficiency Variance = SR(SH – AH) = £2,000 (f)
12
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
STANDARD COSTS AND BUDGETED COSTS
Method 2
For factory overhead costs, the variances are calculated for the factory
as a whole or for each cost centre. When the overhead costs are
calculated for the factory as a whole, the information is given as a
budget rather than as individual standard costs and this requires the
calculation of the Overhead Absorption Rate since no Standard Rate is
available. However, the box method can still be used, with modest
alterations, to calculate the Variable Overhead Variances.
• VOAR = Variable Overhead Absorption Rate
• SHP = Standard Hours Production
Actual Cost
AR
Expenditure Variance
(VOAR × AH) – AC
SR/VOAR
Efficiency Variance
Standard Cost
SR(VOAR(SH/SHP – AH
SH/SHP
AH
Example
From the following information calculate all the Variable Overhead
Variances.
Budgeted: Variable Overheads £7,500
Budgeted Hours 6,000
Actual:
Variable Overheads £9,000
Hours worked 5,000
Standard Hours 5,400
Answer
Variable Overhead Cost Variance = SC – AC = £6,750 – £9,000 = £2,250 (a)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
13
STANDARD COSTS AND BUDGETED COSTS
Variable Overhead Expenditure Variance = (VOAR × AH) – AC = £2,750 (a)
Variable Overhead Efficiency Variance = VOAR(SH – AH) = £500 (f)
• VOAR =
Budgeted Overheads
£7,500
=
= £1.25
Budgeted Hours
6,000
• Standard Cost = Standard Hours × VOAR = 5,400 × £1.25 = £6,750
In this type of question the Standard Rate becomes the Variable
Overhead Absorption Rate. It is important to check that the correct box
layout is used when the information provided is of a budgeted nature.
Actual Cost £9,000
AR £1.80
Expenditure Variance
AH(VOAR – AR) = £2,750(a)
SR £1.25
Efficiency Variance
Standard Cost
£6,750
VOAR(SH – AH) =
£500(f)
SH 5,400
AH 5,000
Fixed overhead variances
Unlike any other cost element, fixed overheads are dealt with in a
separate way since these are always budgeted for. Fixed overheads can
be broken down into more than three variances and include:
• Fixed Overhead Cost Variance – the total variance
• Fixed Overhead Expenditure Variance – occurs when the cost of
overheads is different from that allowed for
• Fixed Overhead Volume Variance – occurs when the volume of
production differs from that allowed for. This variance can be
subdivided into:
14
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
STANDARD COSTS AND BUDGETED COSTS
– Fixed Overhead Efficiency Variance – this arises due to labour
being used more or less efficiently than planned
– Fixed Overhead Capacity Variance – this arises when the hours
worked are more or less than planned.
Like the other costs, fixed overheads can be displayed using a box
layout. The main difference is the use of Budgeted Hours (BH) which
represents the overall total hours set for the work to be completed.
Thus the Fixed Overhead Variances are:
Actual Cost
AR
Expenditure Variance
Box 2
SR/FOAR
Standard Cost
Volume Variance
Box 1
SH/SHP
BH
AH
Fixed Overhead Cost Variance (Box 1 – Box 3) = SC – AC
Fixed Overhead Volume Variance (Box 1 – Box 2) = SC – (FOAR × BH)
Fixed Overhead Expenditure Variance (Box 2 – Box 3) = (FOAR × BH)
– AC
• FOAR = Fixed Overhead Absorption Rate =
Fixed Overheads
Budgeted Hours
• SH can also be SHP and SR can be FOAR.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
15
STANDARD COSTS AND BUDGETED COSTS
Example
Calculate all the Fixed Overhead Variances for the following:
Budgeted Fixed Overheads £4,800
Hours 6,000
Actual Fixed Overheads £5,000
Hours 5,000
Standard Hours 5,400
Answer
FOAR =
Budgeted Fixed Overheads
£4,800
=
= £0.80
Budgeted Hours
6,000
Fixed Overhead Cost Variance = SC – AC = £4,320 – £5,000 = £680(a)
Fixed Overhead Volume Variance = SC – (FOAR × BH) = £480(a)
Fixed Overhead Expenditure Variance = (FOAR × BH) – AC = £200(a)
The Standard Rate becomes the Fixed Overhead Absorption Rate in this
type of question.
Actual Cost £5,000
Expenditure Variance
(FOAR – BH) – AC = £200(a)
FOAR £0.80
Standard Cost
£4,320
Volume Variance
SC – (FOAR × BH)
= £480(f)
SH £5,400
BH 6,000 AH 5,000
The Fixed Overhead Volume Variance can be sub-divided:
• Fixed Overhead Efficiency Variance
• Fixed Overhead Capacity Variance.
In order to calculate the last two Fixed Overhead variances, Fixed
Overhead Efficiency and Fixed Overhead Capacity, alterations are
required to the diagram.
16
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
STANDARD COSTS AND BUDGETED COSTS
Actual Cost
Expenditure Variance
FOAR/SR
Volume
Variance
Capacity
Variance
Efficiency Variance
SH/SHP
!
!
Standard Cost
AH
The Fixed Overhead Volume Variance is sub-divided:
Fixed Overhead Efficiency Variance = FOAR(SH – AH) = £0.8(5,400 –
5,000) = £320(f)
Fixed Overhead Capacity Variance = FOAR(AH – BH) = £0.8(5,000 –
6,000) = £800(a)
Cost variance formulae
Material variance
Material Cost Variance = SC – AC
Material Price Variance = AQ(SP – AP)
Material Usage Variance = SP(SQ – AQ)
Labour variances
Labour Cost Variance = SC – AC
Labour Wage Rate Variance = AH(SR – AR)
Labour Efficiency Variance = SR(SH – AH)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
17
STANDARD COSTS AND BUDGETED COSTS
Variable overhead variances
Variable Overhead Cost Variance = SC – AC or (SH × VOAR) – AC
Variable Overhead Expenditure Variance = AH(SR – AR) or (VOAR × AH)
– AC
Variable Overhead Efficiency Variance = SR(SH – AH) or VOAR(SH – AH)
Fixed overhead variances
Fixed Overhead Cost Variance = SC – AC
Fixed Overhead Volume Variance = SC – (FOAR × BH)
Fixed Overhead Expenditure Variance = (FOAR × BH) – AC
The Fixed Overhead Volume Variance can be sub-divided into:
Fixed Overhead Efficiency Variance = FOAR(SH – AH)
Fixed Overhead Capacity Variance = FOAR(BH – AH)
[The formulae used for standard costing are not uniform. The textbooks
currently on the market provide more than one set of formulae,
however the use of the diagrams will always provide a correct solution
to the question set as will the formulae list provided by SQA.]
18
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
REVENUE VARIANCES
SECTION 4
Revenue variances
Changes in profit occur when the budgeted revenue varies from
the actual revenue.
Actual Revenue
AP
Sales Price Variance
BP
Budgeted
Revenue
Sales Volume Variance
BQ
AQ
The Revenue Variances are
= (Actual Price – Budgeted Price) ×
Actual Quantity
Sales Volume Variance
= (Actual Quantity – Budgeted Quantity)
× Budgeted Price
Total Sales Revenue Variance = Actual Revenue – Budgeted Revenue
Sales Price Variance
The same box layout that is used for the cost variances can be used for
the revenue variances where standard information is replaced with
budgeted information.
The revenue variances can be adverse or favourable depending on
whether the expected selling price and volume of sales were achieved.
Remember that revenue will operate in the directly opposite way to costs.
If the actual sales revenue is less than that budgeted for, the variance is
adverse and if the actual sales revenue is more than that budgeted for,
the variance is favourable.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
19
REVENUE VARIANCES
Reasons for variances
Sales price variances are caused by
•
•
•
•
change in price
change in demand
competitors’ prices
prices of similar products.
Sales volume variances are caused by
•
•
•
•
poor sales force
low levels of production and stock
cancelled orders
high sales returns.
Example
The following information is provided by the Sales Manager:
Budgeted
300
£20
Sales (in units)
Selling Price
Actual
310
£18
Answer
Total Sales Revenue Variance = AR – BR = £5,580 – £6,000 = £420(a)
Sales Price Variance = (AP – BP) × AQ = –£2 × 310 = £620(a)
Sales Volume Variance = (AQ – BQ) × BP = 10 × £20 = £200(f)
Actual Revenue
£18
Sales Price Variance £620(a)
£20
Budgeted
Revenue
£6,000
Sales Volume Variance
£200(f)
BQ 300
20
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
AQ 310
FORMULAE
SECTION 5
Calculation of variances using formulae
Formulae
The calculation of variances can be undertaken using formulae. The
disadvantages of using formulae are that:
• different textbooks give different formulae;
• the standard costing formulae are very similar and mistakes can be
made.
The SQA will provide standard cost formulae for use with the NABs but
will not provide them for students in the External Examination. To
avoid confusion between the many suggested formulae, the SQA have
provided an authorised list that students are expected to use in their
examinations.
Materials
Material Price Variance
= (Standard Price – Actual Price) × Actual
Quantity
Material Usage Variance
= (Standard Quantity – Actual Quantity) ×
Standard Price
Total Material Cost Variance
= (Standard Quantity × Standard Price) –
(Actual Quantity × Actual Price)
Labour
Labour Rate Variance
= (Standard Rate – Actual Rate) × Actual
Hours
Labour Efficiency Variance
= (Standard Hours – Actual Hours) ×
Standard Rate
Total Labour Cost Variance
= (Standard Rate × Standard Hours) –
(Actual Rate × Actual Hours)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
21
FORMULAE
Variable overheads
Variable Overhead
Variance
= (Variable Overhead Absorption Rate ×
Expenditure Actual Hours) – Actual
Cost
Variable Overhead Efficiency = Variable Overhead Absorption
Variance
Rate (Standard Hours – Actual Hours)
Variable Overhead Cost
Variance
= (Standard Hours × Variable Overhead
Absorption Rate) – Actual Cost
Fixed overheads
Fixed Overhead Expenditure = (Fixed Overhead Absorption Rate ×
Variance
Budgeted Hours) – Actual Cost of Fixed
Overheads
Fixed Overhead Volume
Variance
= Standard Cost of Fixed Overheads –
(Fixed Overhead Absorption Rate ×
Budgeted Hours)
Fixed Overhead Cost
Actual Variance
= Standard Cost of Fixed Overhead –
Cost of Fixed Overhead
The Fixed Overhead Volume Variance sub-divides into:
Fixed Overhead Efficiency
(Productivity) Variance
= Fixed Overhead Absorption Rate
(Standard Hours – Actual Hours)
Fixed Overhead Capacity
(Production) Variance
= Fixed Overhead Absorption Rate (Actual
Hours – Budgeted Hours)
Revenue
Sales Price Variance
= (Actual Price – Budgeted Price) × Actual
Quantity
Sales Volume Variance
= (Actual Quantity – Budgeted Quantity)
× Budgeted Price
Total Sales Revenue Variance = Actual Revenue – Budgeted Revenue
22
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
FORMULAE
The application of a formula to calculate variances will produce the same
result as the box approach.
The formulae used in variance analysis can be divided into three:
• the formulae for materials and labour variances are very similar;
• the formulae for variable and fixed overhead variances require the
use of budgeted information and the calculation of overhead
absorption rates;
• the formulae for revenue variances require the use of budgeted
information.
The following worked examples show how all the variances can be
calculated using the formulae.
Example 1
The Greendyke Manufacturing Company manufactures Glitzi using the
following standard specification.
Standard direct labour: 9,600 hours at £3.80 per hour
Standard direct materials: 7,000 metres at £6 per metre
Actual amount of materials used was 7,500 metres costing £45,750.
Actual labour hours were 9,500 costing £38,000.
Using the above information calculate all the variances for both materials
and labour.
Answer
Actual Price =
£45,750
= £6.10
7,500
Actual Wage Rate =
£38,000
= £4
9,500
Material Price Variance =
(SP – AP) × AQ = (£6 – £6.10) × 7,500 = (–£0.1) × 7,500 = £750(a)
Material Usage Variance =
(SQ – AQ) × SP = (7,000 – 7,500) × £6 = (–500) × £6 = £3,000(a)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
23
FORMULAE
Total Material Cost Variance =
(SQ × SP) – (AQ × AP) =(7,000 × £6) – (7,500 × £6.10) = £42,000 –
£45,750 = £3,750(a)
Labour Rate Variance =
(SR – AR) × AH = (£3.80 – £4) × 9,500 = (–£0.2) × 9,500 = £1,900(a)
Labour Efficiency Variance =
(SH – AH) × SR = (9,600 – 9,500) × £3.80 = (100) × £3.80 = £380(f)
Total Labour Cost Variance =
(SR × SH) – (AR × AH) = (£3.80 × 9,600) – (£4 × 9,500) = £36,480 –
£38,000 = £1,520(a)
*Note that a (–) sign indicates an adverse variance and a (+) sign
indicates a favourable variance.
Example 2
Jackson Manufacturer produces plugs for sale to a wide range of retail
outlets. The information that they have on their overhead costs are as
follows.
Budgeted: Variable Overheads £8,000
Fixed Overheads £10,000
Budget Hours 5,000
Actual: Variable Overheads £8,600
Fixed Overheads £9,500
Hours worked 4,000
Standard Hours/Standard
Hours Production 4,500
Calculate all the overhead variances.
Answer
Calculations:
Variable Overhead Absorption Rate =
Fixed Overhead Absorption Rate =
Budgeted Overheads
£8,000
=
= £1.60
Budgeted Hours
5,000
Budgeted Overheads
£10,000
=
= £2
Budgeted Hours
5,000
(Standard Hours × Actual Production)
= 4,500
Standard Hours
Standard Cost = FOAR × Standard Hours = £2 × 4,500 = £9,000
Standard Cost – VOAR × Standard Hours = £1.60 × 4,500 = £7,200
Standard Hours Production =
24
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
FORMULAE
Variable overheads
Variable Overhead Expenditure Variance =
(VOAR × AH) – AC = (£1.60 × 4,000) – £8,600 = £6,400 – £8,600 – £6,400
= £2,200(a)
Variable Overhead Efficiency Variance =
VOAR(SH – AH) = £1.60(4,500 – 4,000) = £800(f)
Variable Overhead Cost Variance =
(SH × VOAR) – AC = (4,500 × £1.60) – £8,600 = £7,200 – £8,600 =
£1,400(a)
Fixed overheads
Fixed Overhead Expenditure Variance =
(FOAR × BH) – AC = (£2 × 10,000) – 9,500 = £500(f)
Fixed Overhead Volume Variance =
SC – (FOAR × BH) = £9,000 – (£2 × 5,000) = £9,000 – £10,000 = £1,000(a)
Fixed Overhead Cost Variance =
SC – AC = £9,000 – £9,500 = £500(a)
Fixed Overhead Efficiency (Productivity) Variance =
FOAR(SH – AH) = £2 (4,500 – 4,000) = £1,000(f)
Fixed Overhead Capacity (Production) Variance =
FOAR(AH – BH) = £2 × (4,000 – 5,000) = £2,000(a)
* Note that a (–) sign indicates an adverse variance and a (+) sign
indicates a favourable variance.
Example 3
The following information is provided by the Production Manager of PB
Manufacturing.
Budgeted
500
£8
Sales (in units)
Selling Price
Actual
480
£10
Calculate all the Revenue Variances.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
25
FORMULAE
Answer
Sales Price Variance =
(AP – BP) × AQ = (£10 – £8) × 480 = £960(f)
Sales Volume Variance =
(AQ – BQ) × BP = (480 – 500) × £8 = (–20) × £8 = £160(a)
Total Sales Revenue Variance =
AR – BR = £4,800 – £4,000 = £800(f)
26
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
EXERCISES
SECTION 6
Question 1
Calculate the material variances from the following data stating whether
they are price variances or usage variances – adverse or favourable.
Material
Details
(a)
Standard price per kilo £40
Standard usage per unit 11 kilos
Actual price per kilo £40
Actual usage per unit 13 kilos
(b)
Standard price per metre £25
Standard usage per unit 60 metres
Actual price per unit £28
Actual usage per unit 60 metres
(c)
Standard price per kilo £3
Standard usage per unit 1,000 kilos
Actual price per kilo £3
Actual usage per unit 973 kilos
(d)
Standard price per gram £17
Standard usage per unit 440 grams
Actual price per gram £14
Actual usage per unit 440 grams
(e)
Standard price per metre £6
Standard usage per unit 88 metres
Actual price per metre £4
Actual usage per unit 85 metres
(f)
Standard price per kilo £117
Standard usage per unit 30 kilos
Actual price per kilo £123
Actual usage per unit 20 kilos
(g)
Standard price per litre £15
Standard usage per unit 158 litres
Actual price per litre £16
Actual usage per unit 165 litres
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
27
EXERCISES
Question 2
Calculate as many variances as you can from the following information.
1.
2.
3.
4.
5.
28
Standard cost per unit
Actual cost of 5,000 units produced
Material 5 kilos @ £0.60 per kilo
Labour 1 hr @ £1.10 per hr
Material 26,500 kilos costing £13,000
Labour 4,800 hrs costing £5,000
Standard cost per unit
Actual cost of 7,500 units produced
Material 3 m @ £2.50 per m
Labour 4 hrs @ £1.20 per hr
Material 21,000 m costing £50,000
Labour 28,000 hrs costing £30,000
Standard cost per unit
Actual cost of 10,000 units produced
Material 5 kilos @ £0.50 per kilo
Labour 2 hrs @ £2 per hr
Variable Overheads 1 hr @ £1/hr
Material 54,000 kilos costing £26,000
Labour 19,000 hrs costing £30,000
Variable overhead 10,000 hrs costing
£15,000
Standard cost per unit
Actual cost of 1,000 units produced
Material 2 m @ £1.50 per m
Labour 6 hrs @ £0.8 per hr
Material 2,000 m costing £4,000
Labour 7,000 hrs costing £7,000
Standard cost per unit
Actual cost of 3,000 units produced
Material 1 g @ £3 per g
Labour 2 hrs @ £1.20 per hr
Material 4,000 g costing £15,000
Labour 6,000 hrs costing £8,000
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
EXERCISES
Question 3
Calculate the standard cost of materials, labour and variable overheads
for each of the following products and related outputs.
1.
2,000 units were produced of product Z where:
Actual costs: Direct materials £800; Direct labour £300; Variable
overheads £200
Favourable variances: Material usage £20; Overhead volume £50
Adverse variances: Material price £40; Labour efficiency £10;
Labour rate £20; Overhead expenditure £30.
2.
1,000 units were produced of product S where:
Actual cost: Direct materials £1,000; Direct labour £400; Variable
overheads £200
Favourable variances: Material usage £10; Overhead volume £40;
Material price £10
Adverse variances: Labour efficiency £20; Labour rate £30;
Overhead expenditure £10.
3.
5,000 units were produced of product A where:
Actual costs: Direct materials £900; Direct labour £200; Variable
overheads £100
Favourable variances: Material usage £20; Overhead volume £20;
Material price £10
Adverse variances: Labour efficiency £20; Labour rate £20;
Overhead expenditure £10
4.
2,000 units were produced of product B where:
Actual costs: Direct material £300; Direct labour £600; Variable
overheads £100
Favourable variances: Material usage £30; Overhead volume £40
Adverse variances: Material price £20; Labour efficiency £20;
Labour rate £10; Overhead expenditure £30.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
29
EXERCISES
Question 4
Calculate as many variances as you can from the following information.
1.
2.
3.
4.
5.
6.
30
Standard Cost per unit
Actual Cost of 10,000 units produced
Material 4 m @ £0.50 per m
Labour 3 hrs @ £1.40 per hr
Material 16,000 m costing
£18,000
Labour 27,000 hrs costing £40,000
Standard Cost per unit
Actual Cost of 4,000 units produced
Material 2 kilos @ £4.00 per kilo
Labour 6 hrs @ £1.00 per hr
Material 10,000 kilos costing £20,000
Labour 40,000 hrs costing £38,000
Standard Cost per unit
Actual Cost of 2,000 units produced
Material 2 m @ £2.50 per m
Labour 1 hr @ £1.00 per hr
Material 6,000 m costing £12,000
Labour 5,000 hrs costing £4,000
Standard Cost per unit
Actual Cost of 1,000 units produced
Material 1 kilo @ £1 per kilo
Labour 2 hrs @ £2 per hr
Material 1,000 kilos costing £1,000
Labour 2,000 hrs costing £4,000
Standard Cost per unit
Actual Cost of 500 units produced
Material 3 kilos @ £0.80 per kilo
Labour 1 hr @ £0.50 per hr
Variable Overheads 2 hrs @ £1/hr
Material 1,400 kilos costing £1,000
Labour 350 hrs costing £400
Variable Overheads 800 hrs costing
£1,500
Standard Cost per unit
Actual Cost of 2,000 units produced
Material 8 kilos @ £0.75 per kilo
Labour 20 hrs @ £0.30 per hr
Variable Overheads1 hr @ £0.70/hr
Material 15,000 kilos costing £14,000
Labour 17,000 hrs costing £20,000
Variable Overheads 5,000 hrs costing
£3,000
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
EXERCISES
Question 5
Calculate the standard cost of materials, labour and variable overheads
for each of the following products and related outputs.
1.
400 units were produced of product S where:
Actual costs: Direct materials £400; Direct labour £100; Variable
overheads £100
Favourable variances: Material usage £5; Overhead volume £60
Adverse variances: Material price £60; Labour efficiency £20,
Labour rate £8.
2.
4,500 units were produced of product A where:
Actual costs: Direct materials £700; Direct labour £1,000; Variable
overheads £300
Favourable variances: Material price £60
Adverse variances: Material usage £30; Labour efficiency £10;
Labour rate £5; Overhead volume £4; Overhead expenditure £6.
3.
8,000 units were produced of product B where:
Actual costs: Direct materials £400; Direct labour £6,000; Variable
overheads £350
Favourable variances: Material usage £4.50; Labour efficiency £3
Adverse variances: Material price £22; Labour rate £37; Overhead
expenditure £64.
4.
2,000 units were produced of product G where:
Actual costs: Direct materials £8,000; Direct labour £300; Variable
overheads £1,200
Favourable variances: Material price £55; Labour rate £40;
Overhead expenditure £23
Adverse variances: Material usage £4.20; Labour efficiency £7.50.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
31
EXERCISES
5.
500 units were produced of product T where:
Actual costs: Direct material £3,000; Direct labour £1,500; Variable
overheads £3,500
Favourable variances: Materials usage £38; Material price £30;
Labour rate £40; Overhead spending £40.
32
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
EXERCISES
Question 6
(a)
Green Manufacturing Co Ltd uses a Standard Costing system. The
following details relate to the current month during which 1,500
units were produced.
Material
Labour
Standard cost per unit
2 kg @ £3 per kg
3 hours @ £10 per hour
Actual cost of 1,500 units produced
2,800 kg @ £2.50 per kg
4,000 hours @ £11 per hour
You are required to calculate the cost variances relating to
materials and labour.
(b)
The Greenend Manufacturing Co Ltd produces a unit for the
computer industry. The following is the information relating to the
production of this unit during the first quarter of the current year
when 10,000 units were produced.
Material
Labour
Standard cost per unit
Actual cost of producing 10,000 units
10 kg @ 50p per kg
195,000 kg @ 60p per kg
4 hours @ £1.80 per hour 40,500 hours @ £1.60 per hour
You are required to calculate the cost variances relating to
materials and labour.
(c)
Macrae Manufacturing Co Ltd operates a Standard Costing system.
The following details relate to this month.
Materials
Labour
Standard cost per unit
5 kg @ £3 per kg
1 hour @ £10 per hour
Actual cost of producing 3,000 units
15,100 kg @ £2.90 per kg
1,450 hours @ £9 per hour
You are required to calculate the cost variances relating to
materials and labour.
(d)
The following data relates to Product Z which MacIntosh
Manufacturing Co Ltd makes. This month 5,000 units were
produced.
Materials
Labour
Standard cost per unit
10 kg @ £0.5 per kg
5 hours @ £0.8 per hour
Actual cost of 5,000 units produced
49,500 kg @ £0.70 per kg
25,200 hours @ £1.10 per hour
You are required to calculate the cost variances relating to
materials and labour.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
33
EXERCISES
Question 7
(a)
Applewhite Manufacturing plc uses a Standard Costing system. The
levels of output for the current month are as follows:
Actual output
2,000 units
Budgeted output 1,800 units
The following details relate to the current month:
Material
Labour
Standard cost per unit
Actual cost of 2,000 units
2 m @ £2 per m
4,600 m @ £1.60 per m
2 hours @ £12.50 per hour 5,000 hours @ £12 per hr
The overheads are recovered on the basis of direct labour hours.
Budgeted output 1,800
Variable overheads £2 per labour hour
Fixed overheads
£3 per labour hour
Actual cost of 2,000 units
£8,000
£20,000
You are required to calculate the cost variances relating to
materials, labour, variable and fixed overheads.
(b)
Brown Manufacturing uses a Standard Costing system. The levels
of output for the current month are as follows:
Actual output
Budgeted output
5,000 units
4,500 units
The following details relate to the current month:
Material
Labour
Standard cost per unit
3 kg @ £3 per kg
2 hours @ £6 per hour
Actual cost of 5,200 units
15,000 kg @ £3.10 per kg
20,000 hours @ £7 per hour
The overheads are recovered on the basis of direct labour hours.
Budgeted output 4,500
Variable overheads £1 per labour hour
Fixed overheads
£2 per labour hour
Actual cost of 5,200 units
£5,000
£30,000
You are required to calculate the cost variances relating to
materials, labour, variable and fixed overheads.
34
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
EXERCISES
Question 8
(a)
Zoda Manufacturing plc has difficulty in identifying its overhead
variances. The information below shows the budgeted and actual
details collected for the past month.
Variable overheads
Fixed overheads
Budgeted
£8,000
£5,000
Actual
£7,000
£5,600
Zoda Manufacturing plc operates a Standard Costing system and
has identified the following hourly details:
Budgeted hours
Standard hours
Actual hours
5,000
5,200
5,600
Using the information above calculate all the overhead variances.
(b)
Yell Manufacturing plc has identified its overhead expenses. The
information below shows the budgeted and actual details they have
collected for the past month.
Variable overheads
Fixed overheads
Budgeted
£20,000
£18,000
Actual
£22,000
£16,000
Yell Manufacturing plc operates a Standard Costing system and has
identified the following hourly details:
Budgeted hours
Standard hours
Actual hours
5,000
4,500
4,000
Using the information above calculate the overhead variances.
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
35
EXERCISES
Question 9
(a)
Cameron Co Ltd has calculated the cost variances and are now
preparing their revenue variances from the following information:
Sales (in units)
Sales (price per unit)
(b)
Actual data
for July
4,500
£13
Duffy Co Ltd has calculated cost variances and is now preparing its
revenue variances from the following information:
Sales (in units)
Sales (price per unit)
(c)
Budgeted data
for July
5,000
£12
Budgeted data
for August
10,000
£20
Actual data
for August
9,000
£18
Edwards Co Ltd has calculated cost variances and is now preparing
its revenue variances from the following information:
Sales (in units)
Sales (price per unit)
Budgeted data
for 3 months to
January
12,500
£30
Actual data
for 3 months to
January
15,000
£35
(d) Ferguson Co Ltd has calculated cost variances and is now preparing
its revenue variances from the following information:
Sales (in units)
Sales (price per unit)
36
Budgeted data
for current month
1,000
£6
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
Actual data
for current month
1,500
£5
SOLUTIONS
SECTION 7
Answer 1
Material
Calculations
(a)
Total Material Cost Variance = (SC – AC) =
£440 – £520 = £80 (A)
Material Price Variance = (SP – AP)AQ =
(£40 – £40)13 = £0 × 13 = 0
Material Usage Variance = (SQ – AQ)SP =
(11 – 13)£40 = –2 × £40 = £80 (A)
(b)
Total Material Cost Variance = (SC – AC) =
£1,500 – £1,680 = £180 (A)
Material Price Variance = (SP – AP)AQ =
(£25 – £28)60 = –£3 × £60 = £180 (A)
Material Usage Variance = (SQ – AQ)SP =
(60 – 60)£25 = 0 × £25 = 0
(c)
Total Material Cost Variance = (SC – AC) =
£3,000 – £2,919 = £81 (F)
Material Price Variance = (SP – AP)AQ =
(£3 – £3)973 = £0 × 973 = 0
Material Usage Variance = (SQ – AQ)SP =
(1,000 – 973)£3 = 27 × £3 = £81 (F)
(d)
Total Material Cost Variance = (SC – AC) =
£7,480 – £6,160 = £1,320 (F)
Material Price Variance = (SP – AP)AQ =
(£17 – £14)440 = £3 × 440 = £1,320 (F)
Material Usage Variance = (SQ – AQ)SP =
(440 – 440)£17 = 0 × £17 = 0
(e)
Total Material Cost Variance = (SC – AC) =
£528 – £340 = £188 (F)
Material Price Variance = (SP – AP)AQ =
(£6 – £4)85 = £2 × 85 = £170 (F)
Material Usage Variance = (SQ – AQ)SP =
(88 – 85)£6 = 3 × £6 = £18 (F)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
37
SOLUTIONS
(f)
Total Material Cost Variance = (SC – AC) =
£3,510 – £2,460 = £1,050 (F)
Material Price Variance = (SP – AP)AQ =
(£117 – £123)20 = –£6 × 20 = £120 (A)
Material Usage Variance = (SQ – AQ)SP =
(30 –20)£117 = 10 × £117 = £1,170 (F)
(g)
Total Material Cost Variance = (SC – AC) =
£2,370 – £2,640 = £270 (A)
Material Price Variance = (SP – AP)AQ =
(£15 – £16)165 = –£1 × 165 = £165 (A)
Material Usage Variance = (SQ – AQ)SP =
(158 –165)£15 = –£7 × 15 = £105 (A)
38
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Answer 2
1.
Materials
AC = £13,000
SC = £0.60 × 5 × 5,000 = £15,000
Total Material Cost Variance = (SC – AC) = £15,000 – £13,000 = £2,000 (F)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£0.60 × 26,500) – £13,000
= £15,900 – £13,000 = £2,900 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £15,000 – (26,500 × £0.60)
= £15,000 – £15,900 = £900 (A)
Labour
AC = £5,000
SC = £1.10 × 1 × 5,000 = £5,500
Total Labour Cost Variance
= (SC – AC) = £5,500 – £5,000 = £500 (F)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1.10 × 4,800) – £5,000
= £5,280 – £5,000 = £280 (F)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £5,500 – (4,800 × £1.10)
= £5,500 – £5,280 = £220 (F)
2.
Materials
AC = £50,000
SC = £2.50 × 3 × 7,500 = £56,250
Total Material Cost Variance = (SC – AC) = £56,250 – £50,000 = £6,250 (F)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£2.50 × 21,000) – £50,000
= £52,500 – £50,000 = £2,500 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £56,250 – (21,000 × £2.50)
= £56,250 – £52,500 = £3,750 (F)
Labour
AC = £30,000
SC = £1.20 × 4 × 7,500 = £36,000
Total Labour Cost Variance
= (SC – AC) = £36,000 – £30,000 = £6,000 (F)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1.20 × 28,000) – £30,000
= £33,600 – £30,000 = £3,600 (F)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £36,000 – (28,000 × £1.20)
= £36,000 – £33,600 = £2,400 (F)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
39
SOLUTIONS
3.
Materials
AC = £26,000
SC = £0.50 × 5 × 10,000 = £25,000
Total Material Cost Variance = (SC – AC) = £25,000 – £26,000 = £1,000 (A)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£0.50 × 54,000) – £26,000
= £27,000 – £26,000 = £1,000 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £25,000 – (54,000 × £0.50)
= £25,000 – £27,000 = £2,000 (A)
Labour
AC = £30,000
SC = £2 × 2 × 10,000 = £40,000
Total Labour Cost Variance
= (SC – AC) = £40,000 – £30,000 = £10,000 (F)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£2 × 19,000) – £30,000
= £38,000 – £30,000 = £8,000 (F)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £40,000 – (19,000 × £2)
= £40,000 – £38,000 = £2,000 (F)
Variable Overheads
AC = £15,000
SC = £1 × 1 × 10,000 = £10,000
Variable Overhead Cost Variance = (SC – AC) = £10,000 – £15,000 = £5,000 (A)
Variable Overhead Expenditure
Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1 × 10,000) – £15,000
= £10,000 – £15,000 = £5,000 (A)
Variable Overhead Efficiency
Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £10,000 – (10,000 × £1)
= £10,000 – £10,000 = 0
4.
40
Materials
AC = £4,000
SC = £1.50 × 2 × 1,000 = £3,000
Total Material Cost Variance = (SC – AC) = £3,000 – £4,000 = £1,000 a
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£1.5 × 2,000) – £4,000
= £3,000 – £4,000 = £1,000 (A)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £3,000 – (2,000 × £1.5)
= £3,000 – £3,000 = 0
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Labour
AC = £7,000
SC = £0.80 × 6 × 1,000 = £4,800
Total Labour Cost Variance
= (SC – AC) = £4,800 – £7,000 = £2,200 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£0.8 × 7,000) – £7,000
= £5,600 – £7,000 = £1,400 (A)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £4,800 – (7,000 × £0.80)
= £4,800 – £5,600 = £800 (A)
5.
Materials
AC = £15,000
SC = £3 × 1 × 3,000 = £9,000
Total Material Cost Variance = (SC – AC) = £9,000 – £15,000 = £6,000 (A)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£3 × 4,000) – £15,000
= £12,000 – £15,000 = £3,000 (A)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £9,000 – (£4,000 × £3)
= £9,000 – £12,000 = £3,000 (A)
Labour
AC = £8,000
SC = £1.20 × 2 × 3,000 = £7,200
Total Labour Cost Variance
= (SC – AC) = £7,200 – £8,000 = £800 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1.20 × 6,000) –£8,000
= £7,200 – £8,000 = £800 (A)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £7,200 – (6,000 × £1.20)
= £7,200 – £7,200 = 0
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
41
SOLUTIONS
Answer 3
1.
Materials
Actual Cost £800; Price Variance £40 (A); Usage Variance £20 (F)
Standard Cost = £800 – £40 + £20 = £780
Labour
Actual Cost £300; Wage Rate Variance £20 (A); Efficiency Variance £10 (A)
Standard Cost = £300 – £20 – £10 = £270
Variable Overheads
Actual Cost £200; Spending Variance £30 (A); Efficiency Variance £50 (F)
Standard Cost = £200 – £30 + £50 = £220
2.
Materials
Actual Cost £1,000; Price Variance £10 (F); Usage Variance £10 (F)
Standard Cost = £1,000 + £10 + £10 = £1,020
Labour
Actual Cost £400; Wage Rate Variance £30 (A); Efficiency Variance £20 (A)
Standard Cost = £400 – £30 – £20 = £350
Variable Overheads
Actual Cost £200; Spending Variance £10 (A); Efficiency Variance £40 (F)
Standard Cost = £200 – £10 + £40 = £230
3.
Materials
Actual Cost £900; Price Variance £10 (F); Usage Variance £20 (F)
Standard Cost = £900 + £10 + £20 = £930
Labour
Actual Cost £200; Wage Rate Variance £20 (A); Efficiency Variance £20 (A)
Standard Cost = £200 – £20 – £20 = £160
Variable Overheads
Actual Cost £100; Spending Variance £10 (A); Efficiency Variance £20 (F)
Standard Cost = £100 – £10 + £20 = £110
4.
42
Materials
Actual Cost £300; Price Variance £20 (A); Usage Variance £30 (F)
Standard Cost = £300 – £20 + £30 = £310
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Labour
Actual Cost £600; Wage Rate Variance £10 (A); Efficiency Variance
£20 (A)
Standard Cost = £600 – £10 – £20 = £570
Variable Overheads
Actual Cost £100; Spending Variance £30 (A); Efficiency Variance
£40 (F)
Standard Cost = £100 – £30 + £40 = £110
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
43
SOLUTIONS
Answer 4
1.
Materials
AC = £18,000
SC = £0.50 × 4 × 10,000 = £20,000
Total Material Cost Variance = (SC – AC) = £20,000 – £18,000 = £2,000 (F)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£0.5 × 16,000) – £18,000
= £8,000 – £18,000 = £10,000 (A)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £20,000 – (16,000 × £0.5)
= £20,000 – £8,000 = £12,000 (F)
Labour
AC = £40,000
SC = £1.40 × 3 × 10,000 = £42,000
Total Labour Cost Variance
= (SC – AC) = £42,000 – £40,000 = £2,000 (F)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1.4 × 27,000) – £40,000
= £37,800 – £40,000 = £2,200 (A)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £42,000 – (27,000 × £1.40)
= £42,000 – £37,800 = £4,200 (F)
2.
Materials
AC = £20,000
SC = £4 × 2 × 4,000 = £32,000
Total Material Cost Variance = (SC – AC) = £32,000 – £20,000 = £12,000 (F)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£4 × 10,000) – £20,000
= £40,000 – £20,000 = £20,000 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £32,000 – (10,000 × £4)
= £32,000 – £40,000 = £8,000 (A)
Labour
AC = £38,000
SC = £1.00 × 6 × 4,000 = £24,000
Total Labour Cost Variance
= (SC – AC) = £24,000 – £38,000 = £14,000 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1 × 40,000) – £38,000
= £40,000 – £38,000 = £2,000 (F)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £24,000 – (40,000 × £1)
= £24,000 – £40,000 = £16,000 (A)
44
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
3.
Materials
AC = £12,000
SC = £2.50 × 2 × 2,000 = £10,000
Total Material Cost Variance = (SC – AC) = £10,000 – £12,000 = £2,000 (A)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£2.50 × 6,000) – £12,000
= £15,000 – £12,000 = £3,000 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £10,000 – (6,000 × £2.50)
= £10,000 – £15,000 = £5,000 (A)
Labour
AC = £4,000
SC = £1 × 1 × 2,000 = £2,000
Total Labour Cost Variance
= (SC – AC) = £2,000 – £4,000 = £2,000 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1 × 5,000) – £4,000
= £5,000 – £4,000 = £1,000 (F)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £2,000 – (5,000 × £1)
= £2,000 – £5,000 = £3,000 (A)
4.
Material
AC = £1,000
SC = £1 × 1 × 1,000 = £1,000
Total Material Cost Variance = (SC – AC) = £1,000 – £1,000 = 0
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= £1 × 1,000) – £1,000 = £1,000 – £1,000 = 0
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £1,000 – (1,000 × £1) = £1,000 – £1,000 0
Labour
AC = £4,000
SC = £2 × 2 × 1,000 = £4,000
Total Labour Cost Variance
= (SC – AC) = £4,000 – £4,000 = 0
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£2 × 2,000) – £4,000 = £4,000 – £4,000 = 0
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £4,000 – (2,000 × £2) = £4,000 – £4,000 = 0
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
45
SOLUTIONS
5.
Material
AC = £1,000
SC = £0.80 × 3 × 500 = £1,200
Total Material Cost Variance = (SC – AC) = £1,200 – £1,000 = £200 (F)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£0.8 × 1,400) – £1,000
= £1,120 – £1,000 = £120 (F)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £1,200 – (1,400 × £0.8)
= £1,200 – £1,120 = £80 (F)
Labour
AC = £400
SC = £0.50 × 1 × 500 = £250
Total Labour Cost Variance
= (SC – AC) = £250 – £400 = £150 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£0.5 × 350) – £400 = £175 – £400 = £225 (A)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £250 – (350 × £0.5) = £250 – £175 = £75 (F)
Variable Overheads
AC = £1,500
SC = £1 × 2 × 500 = £1,000
Variable Overhead Cost Variance = (SC – AC) = £1,000 – £1,500 = £500 (A)
Variable Overhead Expenditure
Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£1 × 800) – £1,500 = £800 – £1,500
= £700 (A)
Variable Overhead Efficiency
Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £1,000 – (800 × £1) = £1,000 – £800
= £200 (F)
6.
46
Material
AC = £14,000
SC = £0.75 × 8 × 2,000 = £12,000
Total Material Cost Variance = (SC – AC) = £12,000 – £14,000 = £2,000 (A)
Material Price Variance
= (SP – AP)AQ = (SP × AQ) – (AP × AQ)
= (£0.75 × 15,000) – £14,000
= £11,250 – £14,000 = £2,750 (A)
Material Usage Variance
= (SQ – AQ)SP = (SQ × SP) – (AQ × SP)
= £12,000 – (15,000 × £0.75)
= £12,000 – £11,250 = £750 (F)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Labour
AC = £20,000
SC = £0.30 × 20 × 2,000 = £12,000
Total Labour Cost Variance
= (SC – AC) = £12,000 – £20,000 = £8,000 (A)
Labour Rate Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£0.3 × 17,000) – £20,000
= £5,100 – £20,000 = £14,900 (A)
Labour Efficiency Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £12,000 – (17,000 × £0.3)
= £12,000 – £5,100 = £6,900 (F)
Variable Overheads
AC = £3,000
SC = £0.70 × 1 × 2,000 = £1,400
Variable Overhead Cost Variance = (SC – AC) = £1,400 – £3,000 = £1,600 (A)
Variable Overhead Expenditure
Variance
= (SR – AR)AH = (SR × AH) – (AR × AH)
= (£0.7 × 5,000) – £3,000
= £3,500 – £3,000 = £500 (F)
Variable Overhead Efficiency
Variance
= (SH – AH)SR = (SH × SP) – (AH × SR)
= £1,400 – (5,000 × £0.7)
= £1,400 – £3,500 = £2,100 (A)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
47
SOLUTIONS
Answer 5
1.
Materials
Actual Cost £400; Price Variance £60 (A); Usage Variance £5 (F)
Standard Cost = £400 – £60 + £5 = £345
Labour
Actual Cost £100; Wage Rate Variance £80 (A); Efficiency Variance
£20 (A)
Standard Cost = £100 – £8 – £20 = £72
Variable Overheads
Actual Cost £100; Spending Variance £0; Efficiency Variance £60 (F)
Standard Cost = £100 + £60 = £160
2.
Materials
Actual Cost £700; Price Variance £60 (F); Usage Variance £30 (A)
Standard Cost = £700 + £60 – £30 = £730
Labour
Actual Cost £1,000; Wage Rate Variance £5 (A); Efficiency Variance
£10 (A)
Standard Cost = £1,000 – £5 – £10 = £985
Variable Overheads
Actual Cost £300; Spending Variance £6 (A); Efficiency Variance £4
(A)
Standard Cost = £300 – £6 – £4 = £290
3.
Materials
Actual Cost £400; Price Variance £22 (A); Usage Variance £4.5 (F)
Standard Cost = £400 – £22 + £4.5 = £382.5
Labour
Actual Cost £6,000; Wage Rate Variance £37 (A); Efficiency Variance
£3 (F)
Standard Cost = £6,000 – £37 + £3 = £5,966
Variable Overheads
Actual Cost £350; Spending Variance £64 (A); Efficiency Variance £0
Standard Cost = £350 – £64 = £286
4.
48
Materials
Actual Cost £8,000; Price Variance £55 (F); Usage Variance £4.2 (A)
Standard Cost = £8,000 + £55 – £4.2 = £8,050.8
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Labour
Actual Cost £300; Wage Rate Variance £40 (F); Efficiency Variance
£7.5 (A)
Standard Cost = £300 + £40 – £7.5 = £332.5
Variable Overheads
Actual Cost £1,200; Spending Variance £23 (F); Efficiency Variance
£0
Standard Cost = £1,200 + £23 = £1,223
5.
Materials
Actual Cost £3,000; Price Variance £30 (F); Usage Variance £38 (F)
Standard Cost = £3,000 + £30 + £38 = £3,068
Labour
Actual Cost £1,500; Wage Rate Variance £40 (F); Efficiency Variance
£0
Standard Cost = £1,500 + £40 = £1,540
Variable Overheads
Actual Cost £3,500; Spending Variance £40 (F); Efficiency Variance
£0
Standard Cost = £3,500 + £40 = £3,540
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
49
SOLUTIONS
Answer 6
(a)
Material
AC = 2,800 × £2.5 = £7,000
SC = 2 × £3 × 1,500 = £9,000
Total Material Cost Variance = (SC – AC) = £9,000 – £7,000 = £2,000 (F)
Material Price Variance
= (SP – AP)AQ = (£3 – £2.5)2,800
= £0.5 × 2,800 = £1,400 (F)
Material Usage Variance
= (SQ – AQ)SP = [(2 × 1,500) – 2,800]£3
= 200 × £3 = £600 (F)
Labour
AC = 4,000 × £11 = £44,000
SC = 3 × £10 × 1,500 = £45,000
Total Labour Cost Variance
= (SC – AC) = £45,000 – £44,000 = £1,000 (F)
Labour Rate Variance
= (SR – AR)AH = (£10 – £11)4,000
= £1 × 4,000 = £4,000 (A)
Labour Efficiency Variance
= (SH – AH)SR = [(3 × 1,500) – 4,000]£10
= 500 × £10 = £5,000 (F)
(b)
Materials
AC = 195,000 × £0.60 = £117,000
SC = 10 × £0.5 × 10,000 = £50,000
Total Material Cost Variance = (SC – AC) = £50,000 – £117,000 = £67,000 (A)
Material Price Variance
= (SP – AP)AQ = (£0.5 – £0.6)195,000
= £0.1 × 195,000 = £19,500 (A)
Material Usage Variance
= (SQ – AQ)SP
= [(10 × 10,000) – 195,000]£0.5
= 95,000 × £0.5 =£47,500 (A)
Labour
AC = 40,500 × £1.6 = £64,800
SC = 4 × £1.8 × 10,000 = £72,000
Total Labour Cost Variance
= (SC – AC) = £72,000 – £64,800 = £7,200 (F)
Labour Rate Variance
= (SR – AR)AH = (£1.80 – £1.60) 40,500
= £0.20 × 40,500 = £8,100 (F)
Labour Efficiency Variance
= (SH – AH)SR
= [(4 × 10,000) – 40,500]£1.80
= 500 × £1.80 = £900 (A)
50
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
(c)
Materials
AC = 15,100 × £2.90 = £43,790
SC = 5 × £3 × 3,000 = £45,000
Total Material Cost Variance = (SC – AC) = £45,000 – £43,790 = £1,210 (F)
Material Price Variance
= (SP – AP)AQ = (£3 – £2.90)15,100
= £0.10 × 15,100 = £1,510 (F)
Material Usage Variance
= (SQ – AQ)SP = [(5 × 3,000) – 15,100]£3
= 100 × £3 = £300 (A)
Labour
AC = 1,450 × £9 = £13,050
SC = 1 × £10 × 3,000 = £30,000
Total Labour Cost Variance
= (SC – AC) = £30,000 – £13,050 = £16,950 (F)
Labour Rate Variance
= (SR – AR)AH = (£10 – £9)1,450
= £1 × 1,450 = £1,450 (F)
Labour Efficiency Variance
= (SH – AH)SR = [(1 × 3,000) – 1,450]£10
= 1,550 × £10 = £15,500 (F)
(d)
Materials
AC = 49,500 × £0.70 = £34,650
SC = 10 × £0.5 × 5,000 = £25,000
Total Material Cost Variance = (SC – AC) = £25,000 – £34,650 = £9,650 (A)
Material Price Variance
= (SP – AP)AQ = (£0.50 – £0.70)49,500
= £0.20 × 49,500 = £9,900 (A)
Material Usage Variance
= (SQ – AQ)SP
= [(10 × 5,000) – 49,500]£0.50
= 500 × £0.50 = £250 (F)
Labour
AC = 25,200 × £1.10 = £27,720
SC = 5 × £0.8 × 5,000 = £20,000
Total Labour Cost Variance
= (SC – AC) = £20,000 – £27,720 = £7,720 (A)
Labour Rate Variance
= (SR – AR)AH = (£0.8 – £1.1)25,200
= £0.30 × 25,200 = £7,560 (A)
Labour Efficiency Variance
= (SH – AH)SR
= [(5 × 5,000) – 25,200]£0.80
= 200 × £0.80 =£160 (A)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
51
SOLUTIONS
Answer 7
(a)
Materials
AC = 4,600 × £1.60 = £7,360
SC = 2 × £2.0 × 2,000 = £8,000
Total Material Cost Variance = (SC – AC) = £8,000 – £7,360 = £640 (F)
Material Price Variance
= (SP – AP)AQ = (£2 – £1.60)4,600
= £0.40 × 4,600 = £1,840 (F)
Material Usage Variance
= (SQ – AQ)SP = [(2 × 2,000) – 4,600]£2
= 600 × £2 = £1,200 (A)
Labour
AC = 5,000 × £12.00 = £60,000
SC = 2 × £12.50 × 2,000 = £50,000
Total Labour Cost Variance
= (SC – AC) = £50,000 – £60,000 = £10,000 (A)
Labour Rate Variance
= (SR – AR)AH = (£12.50 – £12)5,000
=£.5 × 5,000 = £2,500 (F)
Labour Efficiency Variance
= (SH – AH)SR = [(2 × 2,000) – 5,000]£12.5
= 1,000 × £12.5 = £12,500 (A)
Variable Overheads
AC =£8,000
SC = 2 × £2 × 2,000 = £8,000
Total Overhead Cost Variance = SC – AC = £8,000 – £8,000 = £0 (A)
Variable Overhead Expenditure
Variance
= (VOAR × AH) – AC
= (£2 × 5,000) – £8,000 = £2,000 (F)
Variable Overhead Efficiency
Variance
= VOAR/(SH–AH)
= £2(4,000 – 5,000) = £2,000 (A)
Fixed Overheads
AC = £20,000
SC = 2 × £3 × 2,000 = £12,000
BH = 2 × 1,800 = 3,600 hrs
SH = 2 × 2,000 = 4,000 hrs
AH = 5,000 hrs
Fixed Overhead Cost Variance
Fixed Overhead Expenditure
Variance
= SC – AC = £12,000 – £20,000 = £8,000 (A)
= (FOAR × BH) – AC
= (£3 × 3,600) – £20,000 = £9,200 (A)
Fixed Overhead Volume Variance = SC – (FOAR × BH)
= £12,000 – (£3 × 3,600) = £1,200 (F)
52
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Fixed Overhead Efficiency
Variance
Fixed Overhead Capacity
Variance
(b)
= FOAR/(SH – AH)
= £3(4,000 – 5,000) = £3,000 (A)
= FOAR/(AH – BH)
= £3(5,000 – 3,600) = £4,200 (A)
Materials
AC = 15,000 × £3.10 = £46,500
SC = 3 × £3.0 × 5,200 = £46,800
Total Material Cost Variance = (SC – AC) = £46,800 – £46,500 = £300 (F)
Material Price Variance
= (SP – AP)AQ = (£3 – £3.10)15,000
= £0.10 × 15,000 = £1,500 (A)
Material Usage Variance
= (SQ – AQ)SP = [(3 × 5,200) – 15,000]£3
= 600 × £3 = £1,800 (F)
Labour
AC = 20,000 × £7 = £140,000
SC = 2 × £6 × 5,200 = £62,400
Total Labour Cost Variance
= (SC – AC) = £62,400 – £140,000
= £77,600 (A)
Labour Rate Variance
= (SR – AR)AH = (£6 – £7)20,000
= 20,000 × £1 = £20,000 (A)
Labour Efficiency Variance
= (SH – AH)SR = (10,400 – 20,000) £6
= £57,600 (A)
Variable Overheads
AC = £5,000
SC = 2 × £1 × 5,200 = £10,400
Total Overhead Cost Variance = (SC – AC) = £10,400 – £5,000
= £5,400 (F)
Variable Overhead Expenditure
Variance
= (VOAR × AH) – AC
= (£1 × 20,000) – £5,000
= £15,000 (F)
Variable Overhead Efficiency
Variance
= (SH – AH)VOAR
= (10,400 – 20,000)£1
= £9,600 (A)
Fixed Overheads
AC = £30,000
SC = 2 × £2 × 5,200 = £20,800
BH = 2 × 4,500 = 9,000 hrs
SH = 2 × 5,200 = 10,400 hrs
AH = 20,000 hrs
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
53
SOLUTIONS
Fixed Overhead Cost Variance
Fixed Overhead Expenditure
Variance
= SC – AC = £20,800 – £30,000 = £9,200 (A)
= (FOAR × BH) – AC
= (£2 × 9,000) – £30,000 = £12,000 (A)
Fixed Overhead Volume Variance = SC – (FOAR × BH)
= £20,800 – (£2 × 9,000) = £2,800 (F)
Fixed Overhead Efficiency
Variance
= FOAR/(SH – AH)
= £2(10,400 – 20,000) = £19,200 (A)
Fixed Overhead Capacity
Variance
= FOAR/(AH – BH)
= £2(20,000 – 9,000) = £22,000 (A)
54
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Answer 8
(a)
Variable Overheads
VOAR = BO/BH = £8,000/5,000 = £1.60
SC = SH × VOAR = 5,200 × £1.60 = £8,320
Total Overhead Cost Variance
= SC – AC = £8,320 – £7,000 = £1,320 (F)
Variable Overhead Expenditure
Variance
= (VOAR/SR × AH) – AC
= (£1.6 × 5,600) – £7,000 = £1,960 (F)
Variable Overhead Efficiency
Variance
= VOAR/SR(SH–AH)
= £1.6 (5,200 – 5,600) = £640 (A)
Fixed Overheads
FOAR =BO/BH = £5,000/5,000 = £1
SC = SH × FOAR = 5,200 × £1 = £5,200
Fixed Overhead Cost Variance
= SC – AC = £5,200 – £5,600 = £400 (A)
Fixed Overhead Expenditure
Variance
= (FOAR/SR × BH) – AC
= (£1 × 5,000) – £5,600 = £600 (A)
Fixed Overhead Volume Variance = SC – (FOAR/SR × BH)
= £5,200 – (£1 × 5,000) = £200 (F)
Fixed Overhead Efficiency
Variance
= FOAR/SR(SH – AH)
= £1(5,200 – 5,600) = £400 (A)
Fixed Overhead Capacity
Variance
= FOAR/SR(AH – BH)
= £1(5,600 – 5,000) = £600 (A)
(b)
Variable Overheads
VOAR = BO/BH = £20,000/5,000 = £4
SC = SH × VOAR = 4,500 × £4 = £18,000
Total Overhead Cost Variance
= SC – AC = £18,000 – £22,000 = £4,000 (A)
Variable Overhead Expenditure
Variance
= (VOAR/SR × AH) – AC
= (£4 × 4,000) – £22,000 = £6,000 (A)
Variable Overhead Efficiency
Variance
= VOAR/SR(SH–AH)
= £4(4,500 – 4,000) = £2,000 (F)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
55
SOLUTIONS
Fixed Overheads
FOAR =BO/BH = £18,000/5,000 = £3.60
SC = SH × FOAR = 4,500 × £3.60 = £16,200
Fixed Overhead Cost Variance
= SC – AC = £16,200 – £16,000 = £200 (F)
Fixed Overhead Expenditure
Variance
= (FOAR/SR × BH) – AC
= (£3.60 × 5,000) – £16,000 = £2,000 (F)
Fixed Overhead Volume Variance = SC – (FOAR/SR × BH)
= £16,200 – (£3.60 × 5,000) = £1,800 (A)
Fixed Overhead Efficiency
Variance
= FOAR/SR(SH – AH)
= £3.60(4,500 – 4,000) = £1,800 (F)
Fixed Overhead Capacity
Variance
= FOAR/SR(AH – BH)
= £3.60(4,000 – 5,000) = £3,600 (F)
56
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
SOLUTIONS
Answer 9
(a)
Budgeted Revenue = £12 × 5,000 = £60,000
Actual Revenue = £13 × 4,500 = £58,500
Total Sales Revenue Variance = AR – BR = £58,500 – £60,000 = £1,500 (A)
Sales Price Variance = (AP – BP)AQ = (£13 – £12) × 4,500 = £4,500 (F)
Sales Volume Variance = (AQ – BQ)BP = (4,500 – 5,000) × £12 = £6,000 (A)
(b)
Budgeted Revenue = £20 × 10,000 = £200,000
Actual Revenue = £18 × 9,000 = £162,000
Total Sales Revenue Variance = AR – BR = £162,000 – £200,000 = £38,000 (A)
Sales Price Variance = (AP – BP)AQ = (£18 – £20) × 9,000 = £18,000 (A)
Sales Volume Variance = (AQ – BQ)BP = (9,000 – 10,000) × £20 = £20,000 (A)
(c)
Budgeted Revenue = £30 × 12,500 = £375,000
Actual Revenue = £35 × 15,000 = £525,000
Total Sales Revenue Variance = AR – BR = £525,000 – £375,000 = £150,000 (F)
Sales Price Variance = (AP – BP)AQ = (£35 – £30) × 15,000 = £75,000 (F)
Sales Volume Variance = (AQ – BQ)BP = (15,000 – 12,500) × £30 = £75,000 (F)
(d)
Budgeted Revenue = £6 × 1,000 = £6,000
Actual Revenue = £5 × 1,500 = £7,500
Total Sales Revenue Variance = AR – BR = £7,500 – £6,000 = £1,500 (F)
Sales Price Variance = (AP – BP)AQ = (£5 – £6) × 1,500 = £1,500 (A)
Sales Volume Variance = (AQ – BQ)BP = (1,500 – 1,000) × £6 = £3,000 (F)
ACCOUNTING AND FINANCE – VARIANCE ANALYSIS (AH)
57