F5 ACCA December 2013 Exam: BPP Answers

Question 1
Text references. The further processing decision is covered in Chapter 6 of the study text, divisional performance
measures are covered in Chapter 17 and environmental accounting is covered in Chapter 2(e).
Top tips. To deal with part (a) efficiently, you should be able to present your answer clearly. With further
processing decisions, a useful approach is to compare the net revenue from selling the further-processed
products (after deducting further processing costs) with the revenue from selling the part-finished products at the
split-off point.
A possible trap in this question is the normal loss in further processing of 5%, so we are not comparing like-with-
like quantities of output and sale. The loss occurs at the beginning of further processing, so the variable cost of
further processing is a cost per kg output from the process, not a cost per kg input.
When answering parts (b) and (c), you need to keep your eye on the time. It can be very easy to provide an answer
that is unnecessarily long and takes up too much exam time.
Easy marks. If you keep a strict eye on the time, you may identify easy marks in parts (b) and (c) you do not need
the answer to part (a) to answer part (b).
You may think that easier marks are obtainable in part (a), but you need to avoid getting confused about the 5%
normal loss in the further process.

Marking scheme
Marks

(a) Net additional revenue from further processing, allowing for 5% loss 6
Comparable revenue from sale at split off point 3
Conclusion stated 1
10
(b) Discussion. 2 marks maximum per valid point max 5
(c) Maximum 3 marks per technique described max 5
20

(a)
LX MX SX
$ $ $
Selling price per kg 6.70 7.90 6.80
Further processing cost per kg 0.50 0.70 0.80
Sale price minus further processing cost 6.20 7.20 6.00

kg kg kg
Total output of LX, MX, SX (5% loss) 1,140 1,330 1,710
Comparable output of L, M, S 1,200 1,400 1,800

$ $ $
Net revenue from selling LX, MX, SX 7,068 9,576 10,260
Revenue from selling L, M, S 6,720 9,100 10,980
Incremental gain/(loss) from further processing 348 476 (720)

In order to maximise profit, Products L and M should be further processed to make and sell products LX
and MX, but product S should be sold a the split-off point without further processing.

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F5 ACCA December 2013 Exam: BPP Answers

(b) If Division A is required to transfer all its output of products L and M to Division B at marginal cost, it will
earn nil contribution from its output of these products. After allowing for an apportionment of fixed costs,
Division A would report a loss on these products. Even without an external market for the products, the
manager of Division A would have no incentive to produce and transfer these products.
Since there is an external market for products L and M, Division A could make a positive contribution from
selling them externally.
If Division B is charged a transfer price for products L and M that equals the marginal cost of production in
Division A, all the benefit from producing and selling products LX and MX, including the production work in
Division A, will be earned by Division B. Division B would earn a bigger profit than if it had to buy products
L and M at their current market price.
Divisions A and B are both investment centres, and their performance is therefore likely to be measured by
either Return on Investment or residual income. Since Division A would earn no profit on its transfers of
products L and M to Division B, it will make either a negative ROI or a negative residual income, after
allowing for fixed costs, on its production of L and M. Division B, in contrast , will earn a relatively high ROI
or residual income, because of the low price it will pay for transfers of the two products.
A further point is that since transfers will be made at actual marginal cost rather than standard or budgeted
cost, Division A would have no incentive to keep actual costs down. Any overspending on variable cost
items in Division A would be on to Division B.
In summary, the propose transfer pricing system is inappropriate in a divisionalised organisation structure,
and in this situation, the appropriate transfer price for products L and M would be their market price in the
intermediate market.
(c) (Tutorial note. Only two of the techniques need to be described for an answer. All four techniques are
described in the solution provided here.)
Input/output analysis
Input/output analysis is a method of measuring physical inputs to a manufacturing process and physical
outputs. The excess of input quantities over output quantities is recognised as loss in processor
waste/scrap. A cost may also be given to loss or waste in output. This focuses management attention on
the cost of lost or waste output, which is an environmental cost. This cost provides an incentive for
management to reduce the cost. By reducing the amount of waste or loss in process, management will
reduce their environmental cost and improve their performance.
Flow cost accounting
Flow cost accounting is similar in some ways to input/output analysis, in the sense that inputs at the start
of a manufacturing process are traced through every stage in the process, and losses at each stage of the
process are measured in physical terms and also in terms of cost. This method also analyses costs into
three categories: materials costs, system costs (labour and overheads), and disposal costs. Losses in
process as well as finished output are given a cost.
The aim of management should be to reduce the cost of losses in the process, and in doing so they will
reduce environmental costs.
Environmental activity based costing
This is a form of activity based costing in which activities include those that create loss (for example
through emissions) or waste. Cost divers are identified for waste-producing activities and a cost for waste
is included in the cost of finished output.
In traditional absorption costing, or even traditional ABC, waste producing activities are not identified, but
may be hidden in general overhead costs. However with environmental ABC, a cost of waste or loss is
measured within product costs and management are made aware of it.

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 F5 ACCA December 2013 Exam: BPP Answers

Life cycle costing

Life cycle costing is a technique that measures all the costs of a product over its full life cycle. These
include any environmental costs incurred at any stage in the product life. Typically life cycle costs will
include the costs of cleaning up a contaminated production site at the end of a products life.

Question 2
Text reference. Throughput accounting is covered in Chapter 2(d) of the study text.
Top tips. The calculations should be fairly straightforward, but you need to read the question carefully, and
recognise the loss of time for lunch, the percentage utilisation of Machine M and the fact that Machine M is the
bottleneck resource. Then you need to remember that the throughput accounting ratio is the ratio of throughput
per bottleneck hour to factory cost per bottleneck hour.
For part (b) you need to recognise that there is a minimum order for small panels. It can be easy to overlook facts
such as this, but is it critical to getting the right answer. The minimum production of small panels must be allowed
for first, and the remainder of the bottleneck resource time should be used to make large panels.
For part (c), you are asked to suggest how production capacity can be increased. You need to begin by
recognising that this means suggesting ways in which the utilisation of machine M the bottleneck resource can
be increased. There are hints at an answer in the question, but remember that six marks are available for this part
of the question, so dont provide a hasty answer.
Easy marks. You may prefer calculations or you may prefer to suggest ways of increasing the utilisation of
machine M. Either way, there should be some reasonably easy marks here, provided you understand the basic
principles of throughput accounting.

Marking scheme
Marks

(a) Throughput per unit for each product 2

Throughput per bottleneck hour for each product 2
Factory cost per bottleneck hour 1
Throughput accounting ratio for each product 2
Discussion of what the ratios indicate 2
9

(b) Minimum hours and units for small panels 1

Production of large panels in remaining hours 1
Calculation of maximum throughput 1
Calculation of maximum profit 2
5
(c) Up to two marks per suggestion for three suggestions 6 6
20

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F5 ACCA December 2013 Exam: BPP Answers

(a) Maximum annual capacity: 12 hours 5 days 50 weeks = 3,000 hours

Capacity on the bottleneck resource (Machine M): 90% 3,000 = 2,700 hours.
Factory cost per bottleneck hour = $12,000,000/2,700 hours = $4,444.44 per hour.
Large panels Small panels
$ $
Sales price per unit 12,600 3,800
Materials cost per unit 4,300 1,160
Throughput per unit 8,300 2,640
Machine M hours per unit 1.4 0.6
Throughput per bottleneck hour $5,928.57 $4,400.00
Factory cost per bottleneck hour $4,444.44 $4,444.44
Throughput accounting (TA) ratio 1.33 0.99

Large panels have a bigger TA ratio than small panels. On the basis of assumptions used in throughput
accounting, such as the assumption that labour costs are fixed, this suggests that large panels are more
profitable than small panels, because they create more value/profit from the use of the scarce bottleneck
resource.
It should be expected that the throughput accounting ratio for any product should be greater than 1,
meaning that a product should earn more throughput per unit of bottleneck resource than it costs per unit
of bottleneck resource. Unless this ratio can be kept above 1, the long-term viability of a product may be
brought into question. Small panels have a throughput ratio just below 1, at 0.99. Management should seek
to increase this above 1. One way of doing this would be to increase the TA ratio by reducing the cost per
bottleneck hour. Suggestions are discussed in the answer to part (c).
(b) There is an agreed minimum supply of 1,000 units of small panels. All other Machine M hours should be
used to manufacture large panels, up to the maximum sales demand for large panels of 1,800 units or the
maximum capacity of 2,700 hours on Machine M.
Product Units Machine M Machine M Throughput Total
hours hours per unit
per unit total $ $
Small panels 1,000 0.6 600 2,640 2,640,000
Machine hours capacity 2,700
Large panels 1,500 1.4 2,100 8,300 12,450,000
(balance of hours)
Total throughput 15,090,000
Factory costs 12,000,000
Profit 3,090,000

The optimum production mix, given the agreement to produce 1,000 small panels, is to make and sell
1,000 small panels and 1,500 large panels, to earn a profit of $3,090,000.
(c) Since Machine M is a bottleneck resource, the only way to increase production capacity is to increase the
number of hours worked on Machine M. Increasing production capacity on Machine M will increase the
volume of production and sales that is achievable, and so increase total throughput and profit.
Machine M is utilised only 90% of the available work time. We do not know all the reasons why 300 hours
of production time is lost, but one reason is time lost to routine maintenance work by the external
contractors. Since the maintenance contractors work around the clock seven days a week, provided that
the cost of maintenance work is the same whenever it is carried out during the day or week, arranging for
routine maintenance work outside normal working hours might increase the practical capacity and
utilisation of Machine M.

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 F5 ACCA December 2013 Exam: BPP Answers

We are also told that skilled workers are only trained on one type of machine, but there is plenty of spare
capacity on Machines A and C. It would seem sensible to train some of the workers on these two machines
to operate Machine M as well. In this way, when Machine M operators are absent from work, workers from
the other machines can be switched to working on Machine M. This will reduce the amount of lost
production time on Machine M.
A third suggestion is to increase the maximum production capacity on Machine M. By training other
workers to operate the machine, capacity might be increased by reorganising the working day to increase
the number of operating hours. One way of doing this would be to have staggered lunch breaks, and to
operate the machine through the lunchtime period without stopping. Another suggestion would be to
increase the length of the working day from 13 hours, although this might incur extra costs of overtime
working or more staff.

Question 3
Text references. The learning curve is covered in Chapter 10 and the behavioural implications of budgeting are
covered in Chapter 8 of the study text.
Top tips. The key to a good answer in part (a) in the time available is to recognise that for the first few months,
cumulative output per month doubles. This means that the cumulative average time per batch is 88% of what it
was before. The more complex calculation of time per unit only applies in November, when the learning curve
effect has ended.
Part (b) follows on from part (a), but you dont need to get the figure work correct in part (a) to provide a good
answer to part (b).
Part (c) has some connection to the previous two parts of the question, because of the production managers
comments. Good answers are clearly expected to include some discussion of the production managers attitude in
the context of participative budgeting and top-down budgeting. Otherwise the question calls for a straightforward
discussion of the advantages and disadvantages of participative budgeting.
Easy marks. Depending on whether you prefer calculations or writing discussion-style answers, there should be
reasonably simple marks to earn for the labour costs in July to October in part (a), and for comments about
participative budgeting in part (c).

Marking scheme
Marks

(a) Cost each month: July to October (1.5 marks per month) 6
Cost in November 3
9
(b) Maximum 2 marks per point discussed max 4

(c) Maximum 2 marks per advantage discussed

Maximum 2 marks per disadvantage discussed max 7
20

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F5 ACCA December 2013 Exam: BPP Answers

(a)
Cost in
Month Batches in Cumulative Average time Total time to Time in month at
month batches per unit date month $12 per hr
( 88%) hours hours $
July 1 1 200.0000 200.00 200.00 2,400
August 1 2 176.0000 352.00 152.00 1,824
September 2 4 154.8800 619.52 267.52 3,210
October 4 8 136.2944 1,090.36 470.84 5,650
November 8 16 (See workings below) 10,801
Time for first 7 batches = 200 7 -0.184425 = 200 0.6984620 = 139.6924035
hours
Total time for 1st 8 batches (see above) 1,090.36
Total time for 1st 7 batches ( 139.6924035) 977.85
Time for 8th batch 112.51

All batches in November took 112.51 hours each.

Total labour cost in November = 8 112.51 hours $12 per hour = $10,800.96
(Tutorial note: The answer, to 2 decimal places, is over-exact and in practice some rounding of the figures
would be made. Any answer in the region of $10,800 for the cost in November is acceptable, if properly
calculated.)
(b) Implications of the learning effect coming to an end
From November onwards, the average time to produce each new batch of microphones becomes a
standard amount. This means that for the purposes of costing, budgeting and production planning (and
also budgetary control), a standard time per batch (and a standard labour cost per batch) can be used.
To simplify the figures, the standard time may be rounded to 112.5 hours per batch, with a standard labour
cost of $900 per batch.
The times per batch for the previous months, July to October, should not be used for future planning. This
is because the learning curve was still effective, reducing the time to produce each subsequent batch.
It is not apparent why the learning effect ends after the first 8 batches. Management may be able to identify
ways in which the learning effect can be extended. If so this would reduce the cost of future batches still
further.
(c) Involving senior management in the budget-setting process
Advantages
Involving senior management in the budget-setting process would be a form of participative budgeting. The
main advantage of this budgeting process is that the budget would be prepared on the basis of information
available to managers who have detailed working knowledge of operations and the market for the product.
The managing manager individually is unlikely to have the same detailed knowledge.
The senior management, having been involved in preparing the budget, are more likely to be motivated to
achieve the budget targets. In contrast when a budget is imposed from top down, management are much
less likely to have the same incentive especially if they regard the budget targets as too challenging and
unfair.
When a group of senior managers are involved together in setting the budgets for their company, there is
likely to be much greater co-operation between departments and co-ordination of planning targets. Greater
co-operation than with an imposed top-down budget could result in better sharing of information between
departments and a greater sense of being part of the same team.

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 F5 ACCA December 2013 Exam: BPP Answers

In the case of Mic Co, involvement of the production manager in the budgeting process would have given
the manager a better reason to identify and plan for the learning curve effect. As a result, the budget would
have provided for a lower unit cost per batch of microphones and a more efficient budget. With top-down
budgeting, the managing director, did not have the same knowledge of the learning effect. As a result
budgeted costs were too high, the cost plus selling price was too high, and actual sales were disappointing
because of the high price. Arguably, participative budgeting would have prevented this situation from
arising.
Disadvantages
A disadvantage of participative bottom up budgeting is that it can be a time-consuming process, since a
large number of managers need to c-ordinate their planning and agree with each other about what the
plans should be. Valuable management time could therefore be spent on budgeting that could be used
more profitably on other aspects of management work.
Since the amount of time required for budgeting will be longer, the budgeting cycle may have to begin each
year at an earlier time than with top-down imposed budgets.
If managers are given influence or decision-making responsibility for their departmental budget, they may
be tempted to build slack into their budget expenditure allowance. This will make it easier for them to stay
within their budget spending limit and will also give them opportunities for higher spending.
There is also a possibility that all managers will try to obtain a larger share of the available budget
spending, and that departments may therefore argue and compete with each other rather than co-ordinate
their planning efforts.

Question 4
Text reference. Financial performance measurement is covered in Chapter 16 of the study text.
Top tips. With questions such as this on analysis of performance, it is important to recognise that assessment of
performance is based on making comparisons. There are three main ways of making comparisons:
(1) With another division or company
(2) With performance in previous years (and changes from one year to the next, such as rates of revenue
growth)
(3) With established or recognised standards of performance
In this question, you should recognise that comparisons for Division S in 2013 should be made with 2012 and
with the performance of Division C.
Start by making workings for ratios and other measures that you think could be useful for your answer, and try to
present these clearly, so that the marker can see what you have done.
You should simply work through the information provided in the question. A logical approach is to calculate
workings for revenue, then materials cost, then payroll costs, property costs, gross margin, marketing and
distribution costs, administration costs and net profit. You are also given information about market share and
employee numbers, so think about the performance measures you can use with these figures. Perhaps the easiest
calculation to overlook is the total market size for each Division in 2012 and 2013, and the actual growth in the
market between 2012 and 2013.
There is a lot of information in the question, indicating possible reasons for changes in some of the performance
measures from one year to the next, or differences between the performance of the two Divisions. Try to keep in
mind how these items of information may be relevant to the answer.
If you overlook some performance measures, there are many others to write about. The task is to provide as
thorough a performance assessment as you can within the allocated time. It can be all too easy to write for too
much time, leaving yourself insufficient time for your answers to the other question in the paper.

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F5 ACCA December 2013 Exam: BPP Answers

Easy marks. The problem with this question is writing enough in the time available. You should, however, be able
to comment on a various aspects of performance, such as revenue growth, market share, cost to sales ratios and
profit margin. Show your workings and try to provide a clear analysis of each point that you cover. If you do this
you should begin to accumulate marks for your answer.

Marking scheme
Marks

Maximum of 0.5 marks per calculation and maximum of 2 marks per comment
about performance max 20

Workings
Division S Division C
2013 2012 2013 2012
Increase in revenue 44% 9%
Material costs as % of revenue 9% 10% 10% 8%
Payroll costs as % of revenue 26% 22% 20% 19%
Increase in property costs 78% 6%
Property costs as % of revenue 8% 7% 6% 6%
Gross profit margin 56% 61% 65% 67%
Increase in gross profit 32% 6%
Increase in distribution/marketing costs 38% 18%
Increase in administrative costs 6% 0%
Net profit margin 11% 9% 21% 22%
Increase in net profit 86% 5%
Proportion of company net profit 31% 69%
Payroll cost per employee $27,000 $25,020 $21,000 $20,000
Market share 30% 25% 55% 52%
Total market size ($ revenue) note 1 $129.48m $107.75m $80.12m $77.61m
Increase in market size 20% 3%
Note 1
Division S 2013: $38,845,000/30% = $129.483 million
Division S 2012: $26,937,000/25% = $107.748 million
Division C 2013: $44,065,000/55% = $80.118 million
Division C 2012: $40,359,000/52% = $77.613 million
Assessment of financial performance
General comment
Division S achieved extremely strong growth performance in 2013, with revenue up by 44%, gross profit
by 32% and net profit by 86%. In comparison, growth in Division C was much less spectacular, but
Division C operates in a more established market for the company where the total market size is more
stable. In spite of its rapid growth, Division S earned just 31% of the total net profit of the company in
2013, and Division C earned 69%.
Revenue and market share
Revenue growth in Division S was 44% in 2013, compared with 9% in Division C. A part of the reason for
this high growth rate has been the increase in market share from 25% to 30%. Another significant reason
has been the increase in total market size by 20%. This increase in market size is probably attributable
largely to the new fire safety regulations in Sista.

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 F5 ACCA December 2013 Exam: BPP Answers

The increase in market share is probably due in part to the decision to hold prices unchanged in 2013,
when competitors have raised theirs. We do not know how much of the revenue increase in attributable to
the price freeze and how much may be attributable to the higher spending on advertising. (It would be
useful to have this information, but reliable information may be impossible to obtain.)
Together, the price freeze and advertising campaign were not sufficient to enable S Division to become the
market leader within five years of its establishment, as planned. The other two dominant companies have
about 70% of the market, which means that one of them must have a market share of at least 35%.
Division S may well be the second largest competitor in the Sista market now: if not, it must be close to
achieving or exceeding the market share of the rivals.
The increase in market share of 5% compares with an increase of 3% in market share by Division C, which
operates in a fairly stable market. Arguably, the success of Division C, without the benefit of a price freeze
of expensive advertising campaign, is more impressive.
Material costs
Material costs as a percentage of sales fell slightly in Division S (but increased in Division C). We do not
know how the control over material costs has been achieved by Division S, but this would appear to
indicate good cost control. However it could also be attributable to a change in the sales mix towards
products or services that use fewer materials. (More information about the make-up of material costs
would be helpful.)
Payroll costs
Payroll costs in Division S rose from 22% of revenue in 2012 to 26% of revenue in 2013. The increase in
payroll costs as a percentage of labour costs was less in Division C. This increase in payroll costs seems
high. The shortage of skilled labour appears to be a major cause of the cost increase, with the average
salary per employee rising by about $2,000 to $27,000 in Division S (compared with an increase of $1,000
to $21,000 in Division C).
Another reason for the rising labour costs has been the growth in employee numbers by 58% in Division
S and by 9% in Division C. The need for higher employee numbers is undoubtedly due to the growth in
sales revenue and market share (and so the growth in operations). However, since revenue is rising as well
as employee numbers and payroll costs, this does not explain the increase in payroll as a percentage of
revenue.
Further information about the growth in employee numbers would be useful for a more informed
conclusion about these rising costs.
Property costs
The rise in property costs for Division S in 2013 is presumably attributable to the higher tax on property
rents, although Division S may also have been renting more properties to accommodate growth in its
business operations. Further information about the growth in property costs in Division S would be useful
for a more informed conclusion about these rising costs.
Gross profit margin
The fall in gross profit margin, from 61% in Division S in 2012 to 56% in 2013, is attributable to the higher
payroll costs and property costs as a percentage of revenue, and also the decision to freeze selling prices.
The fall in gross profit margin was larger than in Division C, but Division C also suffered some fall in gross
margin mainly due to higher material and payroll costs.
Distribution and marketing costs
Distribution and marketing costs were higher in both Division S and Division C, but the increase in Division
S is attributable largely to the additional advertising campaign. If we remove $2 million from the costs of
Division S and $500,000 from the costs of Division C, costs excluding marketing costs might be $8.522
million in Division S (up by 20% from $7.102m), and might be $6.598 million in Division C (also up by
20% from $5.498m in 2012).

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 F5 ACCA December 2013 Exam: BPP Answers

We know that fuel costs in both countries were 20% higher in 2013, but this cost increase cannot explain
all the increase in distribution costs. For information about the make-up of marketing and distribution costs
would help to provide better performance analysis for these costs.
Administration overheads
These rose by 6% for Division S and did not rise significantly at all in Division C. In view of the large
increase in revenue and growth in operations, this achievement by Division S would seem to be impressive,
suggesting that the Division has been able to support the large growth in business with much the same
amount of administrative effort. More information would be needed about these costs to reach a proper
assessment of performance in this area.
Net profit and conclusion
The net profit margin of Division S increased from 9% of sales in 2012 to 11% in 2013. A bigger net profit
margin might have been expected, but Division S held its prices unchanged and was subject to various cost
pressures notably payroll, property costs and marketing and distribution costs.
This compares with a fall in the net profit margin in Division C, from 22% to 21%. Significantly, this is still
much higher than the net profit margin of S Division. This may suggest that although Calana is much
smaller geographically than Sista, there is probably scope for further improvements in profitability in S
Division in future years.

Question 5
Text reference. Planning and operational variances are covered in Chapter 13 of the study text.
Top tips. Part (a) of this question is straightforward, provided that you have learned how to calculate planning and
operational variances. As you may be aware, there are two approaches to calculating these variances. This solution
follows the method described in the BPP study text. Price variances per unit are valued at the actual quantities of
the item paid for; and usage variances both planning and operational usage variances are priced at the original
standard price per unit of material.
To answer part (b), make sure that you understand what aspects of performance the production manager is
responsible for. In this question, the manager is not responsible for standard costs and so is not responsible for
planning variances. But the manager is responsible for materials buying as well as production operations, and so
has responsibility for both price and usage operational variances.
If you are wondering why the question gives you the budgeted as well as the actual production quantities in the
month, you might well recognise that another aspect of performance to comment on in part (b) is the actual
quantities produced (actual compared with budget). This is a different aspect of performance, but one that will
earn marks for the alert student!
Easy marks. The key to earning easy marks for this question is familiarity with calculating planning and
operational variances, and presenting your calculations clearly. You dont need to have calculated the variances
correctly to make an attempt at answering part (b). Here the starting point is to identify what aspects of
performance the production manager is responsible for and what are outside his control. Make sure that your
answer spells out the aspects of performance that the production manager is responsible for and why. You
might think this is obvious, but you will lose marks if you dont make the point fully ad clearly in your answer.

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 F5 ACCA December 2013 Exam: BPP Answers

Marking scheme
Marks

(a) Up to 3 marks for each variance 12

(b) Maximum 2 marks per valid point discussed max 8
20

(a) (i) Material price planning variance

$ per m2
2
Original standard price per m of cotton 5.00
Revised standard price per m2 of cotton 6.00
Material price planning variance per m2 of cotton 1.00 (A)
Material quantities purchased and used (248,000 + 95,000) = 343,000 m2
Total material price planning variance in $ = 343,000 $1.00 (A) = $343,000 (A)
(ii) Material price operational variance
$ per m2
Actual standard price per m2 of cotton 5.80
Revised standard price per m2 of cotton 6.00
Material price operational variance per m2 of cotton 0.20 (F)
Material quantities purchased and used (248,000 + 95,000) = 343,000 m2
Total material price operational variance in $ = 343,000 $0.20 (F) = $68,600 (F)
(iii) Material usage planning variance
The only usage planning variance applies to the usage of cotton for pillow cases.
m2
Original standard cotton usage per pillow case 0.50
Revised standard cotton usage per pillow case 0.55
Material usage planning variance per pillow case 0.05 (A)
Total quantity of pillow cases produced = 180,000
Material usage planning variance in $
= 180,000 0.05 m2 (original standard price per m2) $5
= $45,000 (A)
(iv) Material usage operational variance
Pillow
Bed sheets cases Total
m2 m2 m2
120,000 bed sheets should use ( 2) 240,000
180,000 pillow cases should use ( 0.55) 99,000
They should use 240,000 99,000 339,000
They did use 248,000 95,000 343,000
Usage operational variance in m2 of cotton 8,000 (A) 4,000 (F) 4,000 (A)
Original standard price per m2 $5
Total material usage operational variance in $ = $20,000 (A)

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(b) The production manager is responsible for all buying and any production issues which occur, but is not
responsible for setting the standard costs.
This means that the manager is not responsible in any way for planning variances, because these arise
from a difference between the standard costs that were set and the standard costs that, in retrospect,
should have been set.
However the production manager should be held responsible for the operational variances for both material
price and material usage.
The actual price paid per square metre of cotton was $5.80, and the standard price should have been $6
(as re-assessed retrospectively). The company holds no inventories, which means that the lower actual
cost cannot be attributed to the fact that there were cheaper opening inventories included in usage for the
month.
It would therefore appear that the production manager has purchased materials more cheaply than
expected, and so is responsible for efficient buying (assuming that the quality of the cotton purchased was
up to the standard required).
For producing the actual output, 339,000 square metres of materials should have been used, but 343,000
square metres were actually used. More cotton was used than should have been. The usage operational
variance can be analysed into an adverse usage variance of 8,000m2 for bed sheets ($40,000(A)) and a
favourable usage variance of 4,000m2 for pillow cases ($20,000 (F)).
We do not know why the adverse usage on bed sheets occurred.
Another aspect of production performance during the month was the actual production volume, compared
with budgeted production quantities. Actual production of pillow cases was 10,000 units less than
budgeted. This shortfall in production was attributable directly to delays caused by changes in the
production specification by the customer; therefore the production manager does not seem to be
responsible for the problem.

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