Q27 HB
(a) Calculation of budgeted profit
Calculation of sales variances
Calculation of material variances
Calculation of labour variances
Calculation of variable overhead variances
Calculation of fixed overhead variances
Actual profit
Format of reconciliation statement
(b) Treatment of fixed costs
Sales volume profit variance
Fixed overhead volume variance
Sales volume profit variance
Fixed overhead volume variance
(c) 1 mark for each valid point
Financial reporting/matching
Need to include fixed cost for pricing and other long term decisions
(a) Reconciliation statement
Budgeted profit (W1)
Sales volume contribution variance (W2)
Selling price variance (W3)
Direct material price variance (W4)
Direct material usage variance (W5)
Direct labour rate variance (W6)
Direct labour efficiency variance (W7)
Variable overhead expenditure variance (W8)
Variable overhead efficiency variance (W9)
Fixed overhead expenditure variance (W10)
Actual profit (W11)
$
F
8,100
2,700
$
A
$
63,600
466,000
36,000
29,600
21,600
10,800
5,200
2,000
48,800 130,800 (82,000)
384,000
Marks
1
1
2
11
1
1
2
1
1
2
Max 2
Max 3
2
2
Max 8
2
2
2
6
25

Workings
1
Budgeted profit
Budgeted sales (10,000 × $180)
Budgeted direct material (10,000 × $86.40)
Budgeted direct labour (10,000 × $22.50)
Budgeted variable overhead (10,000 × $7.50)
Budgeted fixed production overheads
Budgeted profit
2
Sales volume contribution variance
Should have sold
But did sell
Variance in units
× std contribution ($180 – $86.40 – $22.50 – $7.50)
3
Selling price variance
9,000 units should have sold for ( × $180)
But did sell for ( × $184)
4
Materials price variance
74,000 kg should have cost ( × $10.80)
But did cost ( × $11.20)
5
Materials usage variance
9,000 units should have used ( × 8kg)
But did use
Variance in hours
× std cost
$
1,800,000
(864,000)
(225,000)
(75,000)
(170,000)
466,000
10,000 units
9,000 units
1,000 (A)
×$63.60
$63,600 (A)
$
1,620,000
1,656,000
36,000 (F)
$
799,200
828,800
29,600 (A)
72,000 kg
74,000 kg
2,000 (A)
×$10.80
$21,600 (A)

6
Labour rate variance
10,800 hours should have cost ( × $18)
But did cost (×$19)
7
Labour efficiency variance
9,000 units should have taken ( × 1.25hrs)
But did take
Variance in hours
× std cost
8
Variable overhead expenditure variance
10,800 hours should have cost ( × $6)
But did cost
9
Variable overhead efficiency variance
9,000 units should have taken ( × 1.25hrs)
But did take
Variance in hours
× std cost
10
Fixed overhead expenditure variance
Fixed overhead should have cost
But did cost
11 Double check to actual profit calculation:
194,400
205,200
10,800 (A)
$
11,250 hours
10,800 hours
450 (F)
×$18
$8,100 (F)
64,800
70,000
5,200 (A)
$
11,250 hours
10,800 hours
450 (F)
×$6
$2,700 (F)
$
170,000
168,000
2,000 (F)
Actual profit
Actual sales (9,000 × $184)
Actual direct material
Actual direct labour
Actual variable overhead
Contribution
Actual fixed production overheads
Actual profit
(b) system
(i) There are two differences
$
1,656,000
(828,800)
(205,200)
(70,000)
552,000
(168,000)
384,000
between the way that variances are calculated in a marginal costing
And in an absorption costing system.
In marginal costing , fixed costs are not absorbed into product costs and so there are no fixed cost variances to explain any under or over absorption of overheads . There will, therefore, be

no fixed overhead volume variance.
There will, however, be a fixed overhead expenditure variance which is calculated in exactly the same way as for absorption costing systems.
In marginal costing the sales volume variance in units will be valued at standard contribution margin and called the sales volume contribution variance. In standard absorption costing standard profit is used instead of standard contribution.
(b) (ii) OAR = budgeted overhead / budgeted level of activity = $170,000 / 10,000 = $17 per unit
Budgeted profit per unit = contribution (W2) less fixed cost per unit = $63.60 – $17 = $46.60
Sales volume profit variance
Should have sold
But did sell
Variance in kg
 profit
Fixed overhead volume variance
Budgeted production
Actual production
× OAR per unit ($17.00)
(c) Fair share
72, 10,000 units
9,000 units
1,000 units (A)
 $46.60
$46,600 (A)
10,000
9,000
1,000 (A)
× $17
17,000 (A)
Fixed production costs are incurred in order to make output. It is therefore ' fair ' to charge all output with a share of these costs.
Requirements for IAS 2
Closing inventory values, include a share of fixed production overhead, and therefore follow the requirements of the international accounting standard on inventory valuation (IAS 2) .
Matching concept
Absorption costing is consistent with the accruals concept as a proportion of the costs of production are carried forward to be matched against future sales.
Fixed costs have to be recovered to make a profit
A problem with calculating the contribution of various products made by an enterprise is that it may not be clear whether the contribution earned by each product is enough to cover fixed costs , whereas by charging fixed overhead to a product it is possible to ascertain whether it is profitable or not. This is particularly important where fixed production overheads are a large proportion of total production costs. Not absorbing production would mean that a large portion of expenditure is not accounted for in unit costs.