Xavier University – Ateneo de Cagayan

School of Business and Management

Accountancy Department

In Partial Fulfillment
Of the Requirement for the Subject
COST ACCOUNTING AND CONTROL
(AEC 21 – ACD)

AfforDaBest Company
Chickees Roll

Submitted by:
BINAYAO, Tristan Ace C.
CASAS, Moneia Brae
IBALE, Charissa Joyce
LUSABIA, Donna Czalea S.

Submitted to:
Mr. Lucas Lara, CPA
Professor

March 6, 2019
 TABLE OF CONTENTS

Introduction

PART I: Actual Sales and Expenses (Income Statement)

PART II: Cost of Sales based on Standard Rates

PART III: Variance Computation and Discussions

a. Materials Variance
b. Labor Variance
c. Overhead Variance

PART IV: Overall Assessment

Appendices

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INTODUCTION

Background About the Company

AfforDabest Company is a registered sole-proprietorship business managed by Claire L.

Ganas located at the Student Entrepreneurship Center Mall (SEC Mall) of Xavier University—
Ateneo de Cagayan, Corrales Avenue, Cagayan de Oro City. On June 2018, the business started
with an initial investment of Php 42,000 with only five workers. The business manufactures only
one product which is called Chickees Roll. Chickees Roll is made up of commercialize flatten
chicken strips rolled with a melted cheese and sauce inside then coated with a flour and bread
crumbs and served together with a cup of rice. One serving costs Php 39.00 only.

Objective

The main objective of this paper is to assess how the management control their costs and
promotes efficiency in the business.

PART I: Actual Sales and Expenses (Income Statement)

AfforDabest Company
Income Statement
For the months ended November 2018, December 2018, and January 2019

  November December January

Sales ₱ 13,455.00 ₱ 14,157.00 ₱ 17,823.00
Less: Cost of Goods Sold
Direct Materials 6,054.75 6,370.65 5,920.20
Direct Labor 1,880.00 2,120.00 2,772.00
Factory Overhead 940.50 1,077.35 1,180.08
Gross Profit     4,579.75 4,589.00 5,535.12

CAPEX/OPEX
Administrative Expense - - -
Rent Expense 3,000.00 3,000.00 3,000.00
Marketing Expense - - -
Depreciation
Expense 497.22 497.22 497.22
Total Expenses   3,497.22 3,497.22 3,497.22
Net Profit     ₱ 1,082.53 ₱ 1,091.78 ₱ 2,037.90

Additional Information
Selling P Php 39      
Mark-up on Cost 60%
Units Sold 457 363 345
Contribution Margin Php 28.98 Php 26.35 Php 26.35
Contribution Margin ratio 65.96% 67.58% 68.94%

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PART II: Cost of Sales based on Standard Rates

AfforDabest Company
Cost of Goods Manufactured
For the month ended November 30, 2018
  Standard Actual Variance Fav/Unfav
550 457
Direct materials
Beginning inventory ₱ 0 ₱ 0
Materials 8,829.15 8,335.80 -493.35 Unfavorable
Direct labor 1,732.50 2,772 1,039.50 Favorable
Factory overhead 2,970.55 1,180.08 -1,790.47 Unfavorable
Total manufacturing cost 13,532.20 12,287.88 -1,244.32 Unfavorable
Add: WIP, beg 0 0
Less: WIP, end 0 0
Cost of goods manufactured 13,532.20 12,287.88 -1,244.32 Unfavorable
Add: Finished goods, beg 0 0    
Goods available for sale 13,532.20 12,287.88 -1,244.32 Unfavorable
Less: Finished goods, end 0 0
Cost of Goods Sold ₱ 13,532.20 ₱ 12,287.88 -1,244.32 Unfavorable

AfforDabest Company
Cost of Goods Manufactured
For the month ended December 31 2018
  Standard Actual Variance Fav/Unfav
450 363
Direct materials
Beginning inventory ₱ 0 ₱ 0
Materials 7,223.85 6,370.65 -853.2 Unfavorable
Direct labor 1,417.50 2,120 702.5 Favorable
Factory overhead 2,430.45 1,077.35 -1,353.10 Unfavorable
Total manufacturing cost 11,071.80 9,568 -1,503.80 Unfavorable
Add: WIP, beg 0 0
Less: WIP, end 0 0
Cost of goods manufactured 11,071.80 9,568 -1,503.80 Unfavorable
Add: Finished goods, beg 0 0    
Goods available for sale 11,071.80 9,568 -1,503.80 Unfavorable
Less: Finished goods, end 0 0
Cost of Goods Sold ₱ 11,071.80 ₱ 9,568 -1,503.80 Unfavorable

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 AfforDabest Company
Cost of Goods Manufactured
For the month ended January 31, 2019
  Standard Actual Variance Fav/Unfav
400 345
Direct materials
Beginning inventory ₱ 0 ₱ 0
Materials 6,421.20 5,920.20 -501 Unfavorable
Direct labor 1,260 1,880 620 Favorable
Factory overhead 2,160.40 940.5 -1,219.90 Unfavorable
Total manufacturing cost 9,841.60 8,875.25 -966.35 Unfavorable
Add: WIP, beg 0 0
Less: WIP, end 0 0
Cost of goods manufactured 9,841.60 8,875.25 -966.35 Unfavorable
Add: Finished goods, beg 0 0    
Goods available for sale 9,841.60 8,875.25 -966.35 Unfavorable
Less: Finished goods, end 0 0
Cost of Goods Sold ₱ 9,841.60 ₱ 8,875.25 -966.35 Unfavorable

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PART III: Variance Computation and Discussions

a. MATERIALS VARIANCE

FOR THE MONTH OF NOVEMBER

Materials Price Variance   Materials Quantity Variance
Actual Standard Total Standard Total
Standard Price
Quantity Price cost   Quantity cost
457 16.053 7,336.22 550 16.053 8,829.15
457 18.24 8,335.80 457 16.053 7,336.22
Actual Qty. Actual Price -999.58   Actual Qty. Standard Price 1,492.93

Materials Price Variance

An unfavorable price variance of the business suggests an inefficient cost-effective
procurement. The difference means that the purchasing agent acquired the materials at a higher
than the standard price. In other words, the expenses exceed the budget, hence, decreasing their
income. The left side of the table shows that the business only has a standard price of ₱ 16 for
every unit of quantity to be bought, however, the purchasing agent acquired it by ₱ 18 which was
₱ 2 higher than the budget due to the changes in market prices, incurring a higher total cost of
almost ₱1,000. This event can also be the result of the lack of procurement skills of the
purchasing agent that caused to inefficient buying such as acquiring a smelly chicken or
damaged ingredients.
Materials Quantity Variance
The favorable quantity variance shows the efficient usage of the business’ amount of
materials to manufacture their product. The difference implies that the business was able to
minimize their costs by ₱ 1,493 when producing the actual number of units in order to meet the
actual demand during the month of November, hence, increasing their income. This also
corroborates that the business has no wasted materials during production. This reflects the
effective supervision of the production manager when converting their raw materials into
finished goods during their business operations.

Additional Information
  Total Variance Favorable/Unfavorable
-999.58 Unfavorable
1,492.93 Favorable
Net Material Variance 493.35 Favorable

Net Material Variance

The net favorable difference between the two variances suggests that in general, the
management had a good business operation in November. Even though there was a change in
market prices or there is a lacking of procurement skills of the purchasing agent, it was offset by
the effective production management. Which in turn, still incur an increase in the income.

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 FOR THE MONTH OF DECEMBER
Materials Price Variance   Materials Quantity Variance
Actual Standard Total Standard Total
Standard Price
Quantity Price cost   Quantity cost
363 16.053 5,827.24 450 16.053 7,223.85
363 17.55 6,370.65 363 16.053 5,827.24
Actual Qty. Actual Price -543.41   Actual Qty. Standard Price 1,396.61

Materials Price Variance

The unfavorable price variance of (₱ 543) data shows that the business is still having a
hard time to control their expenses and still less efficient, however, it is evident that the
purchasing manager was able to minimize the adverse impact of acquiring the needed materials
higher than the budget. It drastically went down from almost (₱ 1,000) to (₱ 543) which signifies
improvement in the performance of the purchasing agent from very bad to poor. The agent was
able to reduce the cost of every quantity by ₱ 1 from the last month (from ₱ 2 pesos difference of
actual and standard prices to ₱ 1 difference only). In addition, this event can also be due to the
fall of market prices since December is the Christmas season.
Materials Quantity Variance
The favorable computed market quantity variance shows that their production is still
efficient in the month of December. Meaning, there are no wasted raw materials. However, there
is a slight decrease in the quantity variance from last month by ₱ 96 which implies that the
management had some very few errors during the conversion of their raw materials into finished
products. However, the decrease is deemed immaterial and the production manager is still
performing excellently in putting only the raw materials needed into production in order to
satisfy the actual demanded units during December.

Additional Information
  Total Variance Favorable/Unfavorable
-543.41 Unfavorable
1,396.61 Favorable
Net Material Variance 853.20 Favorable

Net Material Variance

The net favorable difference between the two variances implies that generally, the
management was able to maintain and improve their performance in December as it is evident
that there was a 73% increase on their net material variance. Even though the computed materials
price variance is still negative, it was already offset again by the materials quantity variance. In
other words, the business shows prominent improvements in management during this month
which in turn creating an upward pressure on their income.

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 FOR THE MONTH OF JANUARY
Materials Price Variance   Materials Quantity Variance
Actual Standard Total Standard Total
Standard Price
Quantity Price cost   Quantity cost
345 16.053 5,538.29 400 16.053 6,421.20
345 17.160 5,920.20 345 16.053 5,538.29
Actual Qty. Actual Price -381.91   Actual Qty. Standard Price 882.91

Materials Price Variance

The decrease in the unfavorable price variance manifests an improvement of the business
in controlling its acquisition expenses. The business was able to reduce its payments for every
unit of quantity by ₱ 618 from November until this month, a 61.80% decline. This reflects that
the purchasing agent is starting to implement cost effective procurement practices of raw
materials such as availing discounts and finding a cheaper supplier of their ingredients.
Materials Quantity Variance
While the business continues to reduce their price variance, their quantity variance is also
reducing. Even though the computed quantity variance is still favorable as of January, the
management should start to consider this as a red flag on their business since they already had a
36.79% decline on their variance in just one month. Although it can be inferred that the
production still produces no wastes of materials, the decrease represents that their performance is
slowing down. However, the business’s production is still deemed efficient.

Additional Information
  Total Variance Favorable/Unfavorable
-381.91 Unfavorable
882.91 Favorable
Net Material Variance 501 Favorable

Net Material Variance

Compared to the last two months, the business materials variance fluctuates. Last month,
it rose up to 73% while this month, it had a 42.27% decrease. This fluctuation is due to the
consistent improvement of materials price variance while incurring a steady deterioration of their
material quantity variance. For starting businesses, it is a normal event since the managers are
still finding their grasp in administering the business to become profitable. This calls for the
managers to further improve their performance and correct inefficiencies.

b. LABOR VARIANCE

There is no labor variance for AfforDabest Company for the following reasons:

1. NO SUFFICIENT DATA. Since the business is still starting, the management has no
formal monitoring of the incurred labor hours and even payment of salaries to its
workers. As discussed in the midterm paper of this group, the business lacks

8
 managing its direct labor costs making it hard for the analysts to assess their labor
variance.
2. The management only computed the cost of producing per one unit (₱ 3.15 per 4
minutes and 30 seconds, see Appendix 1.) but did not applied it to their daily
operations.
3. Most importantly, the effectiveness of performing a variance analysis generally
depends on the type of the business. Since AfforDabest is a manufacturer, it is best
advice to focus more on the variances of inventory purchase price or material yield.

c. FACTORY OVERHEAD VARIANCE

FOR THE MONTH OF NOVEMBER

Standard rate Allowed units Actual rate  
5.401 550 2.58  
Applied Factory Overhead Actual Factory Overhead (Net FOH Variance) F/U
2,970.55 1,180.08 -1,790.47 F
(Applied Rate x Allowed (Actual Rate x Allowed
Units) Units)    

FOR THE MONTH OF DECEMBER

Standard rate Allowed units Actual rate  
5.401 450 2.97  
Applied Factory Overhead Actual Factory Overhead (Net FOH Variance) F/U
2,430.45 1,077.35 -1,353.1 F
(Applied Rate x Allowed (Actual Rate x Allowed
Units) Units)    

FOR THE MONTH OF JANUARY

Standard rate Allowed units Actual rate  
5.401 400 2,73  
Applied Factory Overhead Actual Factory Overhead (Net FOH Variance) F/U
2,160.40 940.5 -1,219.9 F
(Applied Rate x Allowed (Actual Rate x Allowed
Units) Units)    

ONE-FACTOR Analysis
The analysts used one-factor analysis in assessing the factory overhead of the business.
Since AfforDabest is a small business, one factor analysis is suited because it does not have any
complex accounts that need in depth analysis.
When the applied cost is greater than the actual cost, the variance is favorable. This is
because the business was able to reduce its expected or estimated cost (applied factory overhead)
of indirect materials, labor, and other expenses in producing their finished products against what
the business actually incurred during the production. It can be observed that the variance has
been steadily decreasing over the three months even though both applied and actual also decline
because the business’ estimated factory overhead is decreasing faster. This event is actually
beneficial to the business because this only means that they are efficiently minimizing their costs

9
of production, hence, pushing their income upward. This reflects the efficient management of the
company’s resources as well as even their tiny expenses.

PART IV: Overall Assessment

Based on the individual assessment in the previous parts, the business is steadily growing
over the three months. The management was able to implement cost effective practices on each
of their transactions while as well having significant improvement in their overall performance.

Direct Materials comprises the most significant assets of manufacturing businesses such
as AfforDabest. The company was able to correct its inefficient procurement practices by
steadily reducing their acquisition costs monthly. However, due to mismanagement, the
production was slightly mishandle resulting to a consistent decrease of their quantity variance.
This resulted to the fluctuation of the net material variance that reflects the inconsistent
performance of the business. However, since the company was able to maintain a positive and
favorable variance, they are still considered efficient. Nonetheless, they must consider the
instability of their variance as red flag to their business and must take corrective measures to
counter these problems.

Based on the table of Cost of Goods Manufactured, the business had a positive difference
or variance between the standard and actual labor. This means that the direct labor cost incurred
during the reporting period is within the standard or budget of the business. In simple terms, they
were paying their workers the actual salary they incurred lower than what they budgeted in order
to complete the production process. Hence, it just means that they were able to minimize their
labor cost as they push their income upward.

The one-factor analysis that was done to Factory overhead showed that the business was
able to control even their indirect costs in producing their finished products.

OVERALL, AfforDabest Company was able to control their costs and promote efficiency
during the business operations.

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APPENDICES

Appendix 1. Details of Production Cost

PRODUCTION COSTS
Direct Materials
Unit Unit
Quantity Units Price
Produced Cost
Chicken 190/kl 1.25 kg 237.5 34 6.985
Cabbage 25/kl 170 g 4.25 34 0.125
Carrots 25/kl 170 g 4.25 34 0.125
Cheese 117.75 ½ box 58.875 34 1.732
Tasty boy 9.25/pack 2 pack 18.5 34 0.544
Egg 60/dozen 3 pc 15 34 0.441
Bread
24/pack 2 pack 48 34 1.411
crumbs
Oil 52/kl 1 kl 52 34 1.16
Rice 2000/sack 3 kl 120 34 3.53
TOTAL       558.375   16.053

Direct Labor
Cost
338/8 42.25 per 0.7 per
Wage 4 mins and 30 secs 3.15
hours hour minute

Factory Overhead
Equipments
Useful Depreciatio Unit
Units
life n Cost
Deep Fryer 3000 9 months 2 333.33 0.3
Refrigerator 6000 9 months 1 666.67 0.6
Rice Cooker 900 9 months 1 100   0.09
TOTAL           0.99

Indirect Materials
Unit Unit
Quantity Unit Price
Produced Cost
Packaging 3 34 pc 102 34 3
Sfork 16 3 Pack 48 34 1.411
TOTAL 4.411
TOTAL
FOH           5.401

Appendix 2. Details of Selling Price

SUMMARY
Direct Materials 16.053
Direct Labor 3.15
Factory Overhead 5.401
Product Cost 24.604 11
Mark-Up (60%) 14.76
Selling Price 39.364
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