Church Ltd. manufactures a chemical additive called React.

The following standard costs apply per cylinder : Materials Labor Variable overhead 5kgs @80p per kg 0.20 hours @ 5.50 per hour 0.20 hours @ 2.50 per hour 4.00 1.10 0.50

Fixed overhead 0.20 hours @ 5.00 per hour

1.00 6.60 The monthly sales/ production budget is 10,000 cylinders. Selling price = 9 per cylinder, giving a standard profit margin of 2.40 per cylinder.

For the month of November the following data is available :

Produced/ sold Sales value Material purchased and used (53,200kg) Labour worked and paid (2,040 hours) Variable overheads Fixed overheads 10,600 cylinders 98,500 42,500 10,600 5,800 11,000

You are required to compute the materials, labor, overhead and sales variances.

Solution
Direct material total cost variance
This is a measurement of the difference between the standard material cost of the output produced and the actual material cost incurred. (10,600 x 4.00)- 42,500 = 100 adverse Where the quantities of material purchased and used are different, the total variance should be calculated as the sum of the usage and price variances.

Direct material price variance

Direct material price variance represents the difference between the actual price paid for purchased materials and their standard cost. Actual quantity purchased x actual price = 53,200 x AP = 42,500 Actual quantity purchased x standard price = 53,200 x 0.80 = 42,560 60 (Fav)

Direct material usage variance

Measures efficiency in the use of material, by comparing the Standard cost of material used (42,560) with the standard Material cost of what has been produced (42,400). Actual quantity x Standard price = 53,200 x 0.80 = 42,560 Used
160 (Adv)

Standard x Standard price = 10,600 x5 x 0.80 = 42,400 quantity* * Here standard quantity refers to how much material should have been used to make the actual output. The figure of 42,400 represents the flexed budget cost.

Direct labour total cost variance Indicates the difference between the standard direct labour cost of the output which has been produced and the actual direct labour cost incurred.
(10,600x 1.10)- 10600 =1,060 favourable Direct labour rate variance Indicates the actual cost of any change from the standard labour rate of remuneration. Actual hours x actual rate = 2,040 x AR = 10,600 Paid
620 (Fav)

Actual hours x standard rate = 2,040 x 5.50 = 11,220 Paid

Direct labour efficiency variance

Indicates the standard labour cost of any change from the standard level of labour efficiency. Actual hours x standard rate = 2,040 x 5.50 Worked = 11,220 440 (Fav) Standard x standard rate = (10,600 x 0.20) x 5.50 = 11,660 hours* *As with materials, standard hours represents how long it should have taken to make actual output = actual production in standard hours = the flexed budget.

Variable production overhead total cost variance

Represents the difference between the amount of variable production overhead which has been absorbed by output, and the actual cost.

(10,600 x 0.50) - 5,800 = (500) adverse

Variable production overhead expenditure (or rate) variance The difference between the actual variable production overhead costs and those in a budget flexed on labour hours. Actual hours x actual rate = 2,040 x AR
worked

= 5,800 700 (Adv)

Actual hours x standard rate = 2,040 x 2.50 = 5,100 worked

Variable production overhead efficiency variance

The difference between the variable overhead cost budget flexed on actual labour hours, and the variable overhead cost absorbed by output produced. Actual hours x standard price = 2,040 x 2.50 = 5,100 worked 200 favourable Standard hours* x standard = 10,600 x 0.20 x 2.50 = 5,300 price * As with labour, standard hours represents how long it should have taken to make actual output = actual production in standard hours = the fiexed budget.

Fixed production overhead total cost variance

The difference between the actual fixed production overhead incurred and the amount absorbed by output produced.

(10,600x 1.00)- 11,000 = (400) adverse

Fixed production overhead expenditure variance

The difference between the fixed production overhead costs in the period, and that which was incurred.
Actual fixed production overhead = 11,000 1,000 = 10,000

(Adv) Budgeted fixed production overhead = 10,000 x 1

Fixed production overhead volume variance

The over or under- absorption of overhead cost caused by actual production volume differing from the budgeted. Budgeted fixed production overhead = 10,000

600 ( unFav)
Flexed budget fixed overhead = 10,600 x 1 = 10,600

= actual output x standard cost

Sales price variance

The change in revenue caused by the actual selling price differing from that budgeted. Actual quantity x actual price = 10,600 x AP = 98,500

3,100 (Fav)
Actual quantity x standard price = 10,600 x 9 = 95,400 sold

Sales volume profit variance

The change in profit caused by sales volume differing from the budgeted.
Actual quantity x standard margin = 10,600 x 2.40 = 25,440 sold

1,440 (Fav)
Budgeted sales x standard margin = 10,000 x 2.40 = 24,000