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(1.

) Price and Efficiency Variances:

Standard Cost (price) - a predetermined cost that usually is expressed on a per unit basis

Flexible budget variance = Price Variance + Efficiency Variance

Price Variance - measures how well the business keeps unit prices of material and labor within
established standards

Price Variance Actual Standard Actual


(DM or DL) = (Price/unit - Price/unit) * Quantity

Step One: you need to first find out the price variance for: pineapple, watermelon, and
strawberry respectively. I will show you how to do for pineapple, and leaving the other two for
you to finish yourself.

Pineapple: (Actual $0.9/kg Standard $1/kg) * 36400


= (3640)
Hence, in actual the company spent $3640 less than what was budgeted, so it is $3640
favourable.

Finish the variance analysis for watermelon and strawberry yourself; method is the same as
pineapple. Keep in mind, if spending in actual was less than budgeted = favourable; in contrast, if
spending in actual was more than what has been budgeted = adverse/ not favourable.

Step Two: add the 3 variances you have calculated in step one, and compute the total (final)
variance. I will let you do this step yourself, but it should be looking like this:

(*Important: Here I am only making up the variances for both watermelon and
strawberry just to show you how to do the question watermelon $1000 favourable,
whereas strawberry $(2000) adverse for you to calculate the correct amount, you will
need to use the amount you calculated in step one)

Total Price Variances: (P) $3640 FAV + (W) $1000 FAV + (S) $(2000) ADV
= $2640 Favourable

Efficiency Variance - measures whether the quantity of materials or labor used to make the
actual number of units is within the standard quantity allowed for that level of production.

Same as Price Variance above actually, the method is pretty much the same in fact. It is however,
a bit trickier than price variance analysis, because you will need to find out the standard quantity
for 3 fruits respectively first before going on.

You see from the question, 54000kg of tropical fruit salad was being produced in Oct. Based on
the standard budgeted quantity, the total kg of fruits required to produce 54000kg of fruits salad
will be:
54,000kg / 80kg * 100kg = 67,500kg

67,500kg will only be needed comparing to actual spending of 70,000kg. Whats more you also
need to find out the total kg of the 3 fruits required based on budgeted amount and based their
consumption ratio:

50kg P = 5/10
30kg W = 3/10
20kg S = 2/10
100kg

Pineapple: 5/10*67,500 = 33750 kg


Watermelon: 3/10*67,500 = 20250kg
Strawberry: 2/10*67,500 =13500kg (these are the standard kg that were budgeted)

So now you can proceed to calculate the variances, formula as followed:

Efficiency (Quantity) Variance Actual Standard Standard


(DM or DL) = (Quantity - Quantity) * Price/unit

Step One: you need to first find out the efficiency variance for: pineapple, watermelon, and
strawberry respectively. I will show you how to do for pineapple only, again, and leaving the
other two for you to finish yourself.

Pineapple: (Actual 36400kg Standard 33750kg) * $1 standard price


= $2650
Hence, in actual the company spent $2650 more than what was budgeted, so it is ($2650)
not favourable/adverse.

Finish the variance analysis for watermelon and strawberry yourself; method is the same as
pineapple. Keep in mind again that, if spending in actual was less than budgeted = favourable; in
contrast, if spending in actual was more than what has been budgeted = adverse/ not favourable.

Step Two: add the 3 variances you have calculated in step one, and compute the total (final)
variance. I will let you do this step yourself, but it should be looking like this:

(*Important: Here I am only making up the variances for both watermelon and
strawberry just to show you how to do the question watermelon $1000 favourable,
whereas strawberry $(2000) adverse for you to calculate the correct amount, you will
need to use the amount you calculated in step one)

Total Efficiency Variances: (P)($2650)ADV + (W)$1000FAV + (S)$(2000) ADV


= $(3650) Not Favourable
(2.) Mix and Yield Variances:

Basically you just total material into price and usage, then break down the usage into mix and yield:

Total Material Price


Usage Mix
Yield

Price Variance
Material: Pineapple Watermelon Strawberry Total

AQAP 32760 10920 10780 54460


AQSP (36400kg*1) (18200kg*0.5) (15400kg*0.75)
= 36400 = 9100 = 11550 57050
Variance 3640 FAV (1820) ADV 770 FAV 2590 FAV
AQAP = actual quantity* Actual price
AQSP = actually quantity*Standard price

Workings:

Material Part 1:
P + W + S = Total

1. AQAM 36400 + 18200 + 15400 = 70000


(Actual quantity at actual mix) Mix
2. AQSM 35000 + 21000 + 14000 = 70000

(Actual quantity at standard mix) Usage

3. SQSM Yield 33750 + 20250 + 13500 = 67650


(Standard Quantity at standard mix
for actual output)

4. Standard Price ($) 1 0.5 0.75

The above may look confusing to you, heres the explanation: firstly, in step (1.) its pretty straight
forward. You just put in the actual amount (kg) used for each 3 fruits, and then added up together you will
get 70000kg.

Secondly, and very importantly, put this 70,000kg under step (2.)s Total, then how you get 35000,
21000 or 14000 is as followed: (using the consumption ratio I computed for you in question (1) efficiency
variance analysis) 5/10*70000 = 35000; 3/10*70000 = 21000; 2/10*70000 = 14000.
Thirdly in step (3.) how you get the amount is a bit trickier than step (2.):
From the question it said, 80kg fruit salad required 50kg P + 30kg W + 20kg S
So based on this, compute the ratio out:

P: 50/80 = 5/8
W: 30/80 = 3/8
S: 20/80 = 2/8

After you got this ratio, you will be able to calculate the amount out, BASED ON OUTPUT! (*Output
means, 54000kg actually produced out by the company)

5/8*54000 = 33750; 3/8*54000 = 20250; and last one for strawberry you can calculate yourself to see how
it worked out.

After finishing the workings above, you can now move on to part 2 to find out mix and yield variances.

Material Part 2: (all numbers in $000)


Pineapple Watermelon Strawberry Total
Mix (2 1)*4 (35-36.4)*1 (21-18.2)*0.5 (14-15.4)*0.75
= (1.4) ADV = 1.4 FAV = (1.05) ADV (1.05) ADV
Yield (3 2)*4 (33.75-35)*1 (20.25-21)*0.5 (13.5-14)*0.75
= (1.25) ADV = (0.375) ADV = (0.375) ADV (2.00) ADV
Usage (3 1)*4 (33.75-36.4)*1 (20.25-18.2)*0.5 (13.5-15.4)*0.75
= (2.65) ADV = 1.025 FAV = (1.425) ADV (3.05) ADV

Notice the above (2 1)*4 means step 2s amount minus step 1s amount, and then times step 4s amount. I
found it the most useful way to remember how to get the number.

(3.) Comment (what does the variances mean?)


In requirement (2):

Mix a favourable variance would suggest that more lower value material is being used hence reducing
the overall average cost per unit. Vice versa.

Yield an adverse variance would suggest that less output has been achieved for a given input, i.e. that the
total input in volume is more than expected for the output achieved.

In requirement (1):
I want you to think yourself, but I will tell you some factors that cause variances:

Operational factors:
Material Price: If favourable: Bulk discounts good purchasing
If Adverse: Market price increase (shortage), Bad purchasing, delivery cost
(Different supplier? Different material? Change in quality?)

Material Usage: If favourable: Better quality, more efficient


If Adverse: Defective material, theft, excessive waste/spoilage, stricter quality control
(Different batch size? Change in mix?)