Variance analysis

1 The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The production process
begins with workers weighing out ingredients on electronic scales and then placing them in a machine for mixing. A
worker then manually removes the mix from the machine and shapes it into loaves by hand, after which the bread is
then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and made ready for sale.
Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:
$
White flour 450 grams at $1·80 per kg 0·81
Wholegrain flour 150 grams at $2·20 per kg 0·33
Yeast 10 grams at $20 per kg 0·20
–––– ––––
Total 610 grams 1·34
–––– ––––
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual production was only
950 units. The total actual quantities used and their actual costs were:
Kg $ per kg
White flour 408·5 1·90
Wholegrain flour 152·0 2·10
Yeast 10·0 20·00
––––––
Total 570·5
––––––

Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for the last quarter.
(7 marks)

(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE MATERIAL YIELD
variance could arise at OBC. (3 marks)
(10 marks

1 Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made
in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for each batch is $6·00
and the standard labour time for each batch is half an hour. In November, Truffle Co had budgeted production of
24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work
and there was no idle time. All workers were paid for their actual hours worked. The actual total labour cost for
November was $136,800. The production manager at Truffle Co has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting
a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut
with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented
immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it takes
time before the workers become used to working with the new ingredient mix, making the process 20% slower for at
least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the system outside
of this.
 Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the standard cost
provided above. (4 marks)

(b) Analyse the total labour rate and total labour efficiency variances into component parts for planning and
operational variances in as much detail as the information allows. (8 marks)

c) Assess the performance of the production manager for the month of November. (8 marks)

1 Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-time system
and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2. Each bed sheet
uses 2 m2 of cotton and each pillowcase uses 0·5 m2. Production levels for bed sheets and pillowcases for November
were as follows:
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used to make the bed
sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning of the month,
the hotel chain made an unexpected request for an immediate design change to the pillowcases. The new design
required 10% more cotton than previously. It also resulted in production delays and therefore a shortfall in production
of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which occur, although he
is not responsible for the setting of standard costs.

Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow cases, and in
total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance.(3 marks)

(b) Assess the performance of the production manager for the month of November. (8 marks)

(20 marks)

1 Block Co operates an absorption costing system and sells three types of product – Commodity 1, Commodity 2 and
Commodity 3. Like other competitors operating in the same market, Block Co is struggling to maintain revenues and
profits in face of the economic recession which has engulfed the country over the last two years. Sales prices fluctuate
in the market in which Block Co operates. Consequently, at the beginning of each quarter, a market specialist, who
works on a consultancy basis for Block Co, sets a budgeted sales price for each product for the quarter, based on his
expectations of the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself
is run by the company’s sales manager, who negotiates the actual sales prices with customers. The following budgeted
 figures are available for the quarter ended 31 May 2013.
Product Budgeted production Standard selling price Standard variable
and sales units per unit production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28·40
Commodity 3 26,000 $41·60 $26·40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine hours and
the budgeted cost of these for the quarter ended 31 May 2013 was $174,400. Commodity 1, 2 and 3 use 0·2
hours, 0·6 hours and 0·8 hours of machine time respectively.
The following data shows the actual sales prices and volumes achieved for each product by Block Co for the quarter
ended 31 May 2013 and the average market prices per unit.
Product Actual production and Actual selling price Average market price
sales units per unit per unit
Commodity 1 29,800 $31 $32·20
Commodity 2 30,400 $34 $33·15
Commodity 3 25,600 $40·40 $39·10
The following variances have already been correctly calculated for Commodities 1 and 2:
Sales price operational variances
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable

Sales price planning variances

Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse

Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning variance.
(4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and the
total sales quantity variance. (11 marks)

(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for the quarter
ended 31 May 2013. (5 marks)

(20 marks)

4 The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard cost card for one
batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0·25 10
Coconut oil 0·6 4
Shea butter 0·5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales were 136,000
batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200

Required:
(a) Calculate the total material mix variance and the total material yield variance for September. (8
marks)

(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September I made some changes to the mix of ingredients used for the soaps. As I expected, the
mix variance is adverse in both months because we haven’t yet updated our standard cost card but, in both months,
the favourable yield variance more than makes up for this. Overall, I think we can be satisfied that the changes made
to the product mix are producing good results and now we are able to produce more batches and meet the growing
demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales volume variance
for October was $22,000 adverse. I’ve tried to explain that the quality of the soap has declined slightly and some of
my customers have realised this and simply aren’t happy but no-one seems to be listening. Some customers are even
demanding that the price of the soap be reduced and threatening to go elsewhere if the problem isn’t sorted out.’

Required:
(i) Briefly explain what the adverse materials mix and favourable materials yield variances indicate about
production at Safe Soap Co in October.
Note: You are NOT required to discuss revision of standards or operational and planning variances.

(4 marks)
(ii) Discuss whether the sales manager could be justified in claiming that the change in the
materials mix has caused an adverse sales volume variance in October. (3
marks)
(c) Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The standard cost
of labour for each pair is $42 and the standard labour time for each pair is three hours. In the last quarter,
Glove Co had budgeted production of 12,000 pairs, although actual production was 12,600 pairs in order to
meet demand. 37,000 hours were used to complete the work and there was no idle time. The total labour cost
for the quarter was
$531,930.
At the beginning of the last quarter, the design of the gloves was changed slightly. The new design required workers
to sew the company’s logo on to the back of every glove made and the estimated time to do this was 15 minutes for
each pair. However, no-one told the accountant responsible for updating standard costs that the standard time per
pair of gloves needed to be changed. Similarly, although all workers were given a 2% pay rise at the beginning of the
last quarter, the accountant was not told about this either. Consequently, the standard was not updated to reflect these
changes.
When overtime is required, workers are paid 25% more than their usual hourly rate.

Required:
(i) Calculate the total labour rate and total labour efficiency variances for the last quarter.(2 marks)

(ii) Analyse the above total variances into component parts for planning and operational variances in as
much detail as the information allows.(6 marks)

(iii) Assess the performance of the production manager for the last quarter. (7 marks)
31 The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is with the Girls’
Private School Trust (GPST), which has 35 schools across the country, all with the same school uniform.
After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-designed to
incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is 10% more material
than the previous style of dress required. However, a new material has also been chosen by the GPST which costs
only $2·85 per metre which is 5% cheaper than the material used on the previous dresses. In February, the total
amount of material used and purchased at this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used. Consequently,
all staff required training before they could begin production. The manager of the sewing department expected each
of the new dresses to take 10 minutes to make as compared to 8 minutes per dress for the old style. SU Co has 24
staff, each of whom works 160 hours per month and is paid a wage of $12 per hour. All staff worked all of their
contracted hours in February on production of the GPST dresses and there was no idle time. No labour rate variance
arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co uses
standard costing and usually, every time a design change takes place, the standard cost card is updated prior to
production commencing. However, the company accountant responsible for updating the standards has been off sick
for the last two months. Consequently, the standard cost card for the new dress has not yet been updated.

Required:
(a) Calculate the material variances in as much detail as the information allows for the month of February.
(7 marks)

(b) Calculate the labour efficiency variances in as much detail as the information allows for the
month of February. (5 marks)

(c) Assess the performance of the production manager for the month of February. (8 marks)

(20 marks)
Page 2 of 8
Page 3 of 8
QUESTION 1

(a) Explain four (4) differences between job costing and process costing.
(4 marks)

(b) Walk Through Limited uses the weighted-average method in its process costing
system. The following data relate to the Operations of Department 1 of the company
for a recent month.

Work in process,
beginning: Units in 100
process 70%
Stage of completion with respect to materials 90%
Stage of completion with respect to
conversion
GHS182
Costs in the beginning GHS3,42
inventory: Materials cost 9 10,000
Conversion cost 9,70
Units started into production during the 0
month Units completed and transferred to
department 2
GHS27,986
Costs added to production during the GHS373,81
month: Materials cost 5
Conversion cost

Work in process, 400

ending: Units in
Required: 90%
process 70%
Using the weighted-average method, determine the:
Stage of completion with respect to materials
Stage of completion with respect to
i. Equivalent units of production for materials and conversion costs.
conversion
ii. Cost per equivalent unit for materials and conversion costs.
iii. Cost of units transferred out of the department during the month.
iv. Cost of ending work in process inventory in the department. (8
marks)

(c) Deschamp Ltd has established the following standards for raw material and variable
manufacturing overheads used in the production of product G13 for the just ended
quarter: Standard quantity of the material per unit output 2.3 litres,

Page 4 of 8
Standard price of the GHS19.00 per
material Actual material litre 5,100 litres
purchased GHS100,725
Actual material used in 2.5 hours per unit of
production Standard direct G13
labour-hours

Page 5 of 8
 QUESTION 4
Standard variable manufacturing overhead rate GHS7.70 per hour
Actual direct labour-hours worked 5,200
Actual variable manufacturing overhead GHS44,980
incurred Actual output 2,040 units of product
G13
The company’s variable manufacturing overhead is applied on the basis of direct labour-hours.

Required:

Compute for Deschamp Ltd the following for the just ended month:

i. the materials price variance

ii. the material quantity variance
iii. the variable overhead spending variance
iv the variable overhead efficiency variance (8 marks)

Bee Ltd produces Cocoa drink in Accra by mixing three ingredients; K, Y, and Z in the proportions 5: 3: 2
respectively.

The production process does not always mix the ingredients in these proportions, but the drink can be sold if the
mixture is within certain limits. The standard prices for the ingredients are:-

K - GHC 2.40 per litre

Y - GHC 2.00 per litre
Z - GHC 2.88 per litre

There is 10% normal loss during the process, so that the expected yield is 90%. During the

last period, the output of the cocoa drink was 184,000 litres.

The inputs were:

92,000 litres of K at GHC 2.52 per litre
68,000 litres of Y at GHC 1.88 per litre
42,000 litres of Z at GHC 2.92 per litre

Page 6 of 8
 Calculate the following variance:

(a) (i) Materials mix variance (3 marks)

(ii) Material yield variance (3 marks)

(iii) Material usage variance (3 marks)

(b) Explain the following variances

(i) Planning variance (2½ marks)

(ii) Operational variance (2½ marks)

(c) State two (2) advantages and two (2)disadvantages of variance analysis
using planning and operating variances. (6 marks)

Atta Kwame Manufacturing Company operates a standard costing system. The following was the
budgeted income statement for the year 2011.

Budgeted Income Statement for 12,000 units

GHC
Direct materials (3 kilos per 144,000
unit) Direct labour cost (1½ hrs 108,000
per unit) 36,00
Variable Overheads (based on direct labour 0
hrs) Fixed Overheads (based on direct
labour hrs) Total cost 54,000
Budgeted 342,00
profit 0
Actual activities for the year 2011 were as follows:
Budgeted
sales
Stock levels Opening Stock 90,000
Closing Stock
Direct Materials 1,000 800432,00
(units) Finished 2,400 2,80 0
Goods(units) 0
Actual Production 13,900 units

Actual Costs:

(i) Direct Materials Purchased 42,000 units at a total cost of

GHC189,000
(ii) Direct Labour Costs 22,000 Hrs at a total cost of
GHC110,000
Page 5 of 7
(iii) Variable Overheads GHC44,480

(iv) Fixed Overheads GHC54,000

 Actual Selling Price was GHC34 per unit

Required:

(a) Prepare the Actual Income Statement

(8 marks)

(b) Reconcile the Actual Profit with the Budgeted Profit indicating clearly all
relevant Sales, Materials, Labour and Overhead variances.

QUESTION 4

The underlisted data relate to actual output, costs and variances for the monthly accounting
period of a company that makes only one product. Opening and closing work in progress were the
same.

Variances: GH₵
Direct materials price 30000 F
Direct materials usage 18000 A
Direct labour rate 16000 A
Direct labour efficiency 32000 F
Variable production overhead expenditure 12000 A
Variable production overhead efficiency

800

0 F Variable production overhead varies with labour hours worked.

A standard marginal costing system is operated.

Actual production of product BM 36,000

units Actual costs incurred:

Direct materials purchased and used (300,000 kg)
GH₵420,0
00 Direct wages for 64000 hours
GH₵272,0
00
Variable production overhead GH₵76,000

Required:

(a) (i) Calculate the standard cost of materials and standard rate per labour
hour.
Page 6 of 7
(ii) Prepare a standard product cost sheet for one unit of product BM.
 (12 marks)

(b) Explain the possible causes of the following variances:

(i) Material price variance

(ii) Material usage variance
(iii) Wage rate variance
(iv) Labour efficiency variance (8
marks)
(Total: 20
marks

Page 7 of 7
QUESTION 3
(c) {a} FAMU Ltd. operates a standard costing system and produces FAAMU products for use in
the hospitality industry. the month August the following was
prepared: During of 2013, report

Budget Actual

Units Produced and Sold 4,500 5,000

(Units)
Labour Hours (Hours) 9,000 8,200
GH₵ GH₵

Direct Material Cost 18,00 22,50

Direct Labour Cost 0
18,000 0
20,000
Variable Overheads 18,000 15,000
Fixed Overheads 22,500 22,500
Sales Revenue 90,000 110,000
Profit 13,500 30,000
(d)
(e)
(f) It presented the standard data per unit of its product as follows:
(g) GH¢
(h)
1] Director Material (10 kg @ GH¢0.40) 4
2] Director Labour (2 hrs @ GH¢2/hr) 4
3] Variable Overheads (GH¢2.00/Labour 4
hour)
4] Fixed Overhead (GH¢5/unit) 5
Total Cost 17
Profit 3
Selling Price 20

Page 8 of 7
 (i) I] Calculate the Total Variable Overhead Cost Variance and analyze it into Variable
Overhead Expenditure and Variable Overhead Efficiency Variances.

(j) (3 marks)
(k)
(l)
(m) II] Calculate Total Material Cost Variance and analyze it into Material Price and Material
Usage Variances.

(n) (3 marks)
(o)
(p) III] Calculate the Total Labour Cost Variance and analyze it into Labour Rate Variance and
Labour Efficiency Variance. (3 marks)
(q)
(r) IV] Calculate the Total Sales Variance under Marginal Costing System and analyze it into
Price and Volume Variances.

(s) {b} Distinguish between Standard Costing and Budgetary Control.

QUESTION ONE

a) Explain the following terms as used in standard costing.

(3marks)
i. Basic cost standards
ii. Ideal standard
iii. Currently Attainable standards

b) Evaluate FOUR (4) purposes of standard costing.

(4marks)

c) Explain FOUR (4) problems associated with standard costing in today’s

environment.

(4marks)
d) Borga limited produces cocoa powder for cocoa beverage manufacturing
companies. The management accountant has produced the following variance
analysis information for management discussions.

Actual sales

Page 2 of 25
Selling price ¢225 Sales
volume 9000units Variable
cost ¢170

Standard cost: Selling

price ¢220
Variable cost ¢170
Sales volume 10,000

Page 3 of 25
 QUESTION THREE

Other variances have already been calculated as follows

Variances GHS

Direct cost variances:

Material: Price 22,250A

Usage 66,250A
Labour: Rate 42,750A
Efficiency 33,750A

Manufacturing Overhead variances:

Fixed overhead expenditure variance 10,000F
Variable overhead expenditure variance 12,500F
Variable overhead efficiency variance 7,500A

The following additional information was extracted from the management accounts.

GHS
Budgeted net profit for the period 200,000
Actual profit 45,000

You have been asked as cost Accountant to reconcile the Budgeted profit to the actual profit using the
variance report generated by the management accountant.

Required:

i. Calculate the sales variances (2marks)

ii. The total material variance (1mark)
iii. The Total wage variances (1mark)
iv. Total manufacturing overhead variances (1mark)
Reconciliation of Budget profit to the actual profit. (4marks)

Page 4 of 25
QUESTION THREE
QUESTION FOUR

a) Jungle Twist Ltd manufactures quality blocks for the housing industry in Ghana. It
operates a standard marginal costing system. The following standard costs,
volume and revenue data for the quarter ending 31 October, 2015 are provided:

Standard cost card:

Selling price GH¢18 per block
Costs:
Direct material P 3 kg at GH¢2.60 per kg
Q 2 kg at GH¢2.50 per kg
Direct labour 2 hours at GH¢0.60 per hour

Budgeted sales for the quarter: 62,500 blocks

Variable overheads are absorbed at the rate of GH¢0.50 per direct labour hour. Fixed
production overheard for the quarter are estimated to be GH¢78,500
The following actual results were recorded for the quarter just ended 31 October, 2015:

Page 5 of 25
 Production : 60,000 blocks
Sales : 58,000 blocks
Price : GH¢17.00 per block
Direct material P 150,000 kg were bought and used at
Q GH¢360,000
109,000 kg were bought and used at
Direct labour GH¢327,000
108,000 hours were worked for at a cost of
GH¢90,400
Variable overheads
GH¢82,0
00 Fixed production overheads
GH¢80,0
00

Required:
Calculate the following variances for the quarter just ended 30 September, 2015 the:
i) Sales volume and sales price variances; (3 marks)
ii) Price and usage variances for each material; (3 marks)
iii) Mix and yield variance for each material; (3 marks)
iv) Labour rate, labour efficiency and idle time variances; and (3 marks)
v) Variable overheads expenditure and variable overheads efficiency variances.
(3 marks)

b) Describe the balanced score card approach to performance measurement.

(5 marks)

(Total: 20 marks)

QUESTION FIVE

You are the Management Accountant of ABS Limited. The following computer printout shows
details relating to June 2017.
Actual Budget
Sales volume 4,900 units 5,000 units
Selling price per unit GH¢11.00 GH¢10.00
Production volume 5,400 units 5,000 units
Direct materials
Quantity 10,600kg 10,000kg
price per kg GH¢0.60 GH¢0.50
Direct labour
hours per unit 0.55 0.50
rate per hour GH¢3.80 GH¢4.00
Fixed overhead
Production GH¢10,300 GH¢10,000
Administration GH¢3,100 GH¢3,000

ABS Limited uses a standard absorption costing system. There was no opening or closing work-in-
progress

Required
Prepare a statement which reconciles the budgeted profit with the actual profit for June 2017,
showing individual variances in much detail. (15 marks)
Page 7 of 21
QUESTION FIVE

a) With regard to variance analysis for all production costs (direct material, direct labour, and
overhead), it is important to note that each variance does not represent a separate and distinct
problem to be handled in isolation. All variances in one way or another are interdependent.

Required:
i) Explain what you understand by the term “inter-relationship between variances”. (2 marks)
ii) Explain possible reasons for inter-relationship between material variances and labour
variances. Support your answer with examples. (4 marks)

Page 8 of 21
Required:
b) Ghana National Gas Company is a gas processing company and has its plant located in
Atuabo in Western Region. The Plant produces three gas products – Lean Gas (LG),
Liquefied Petroleum Gas (LPG) and Natural Gas Condensate (NGC).
The standard time for the production of the products are:
LG - 40 minutes per metric tonne, LPG - 30 minutes per metric tonne, NGC – 45 minutes per metric tonne

The budget for the month of February is as follows:

LG – 45,000 metric tonnes, LPG – 25,000 metric tonnes, NGC – 30,000 metric tonnes

The actual data for the month were as follows:

Labour hours 70,000 hours
Production: LG – 48,000 metric tonnes, LPG – 27,000 metric tonnes, NGC– 25,000 metric tonnes

Required:
Compute and interpret the following:
i) The efficiency ratio. (3 marks)
ii) The capacity ratio.(3 marks)
iii) The production volume or activity ratio. (3 marks)

(Total: 15

marks)

QUESTION FIVE

a) Emefa Ltd bakes cakes by mixing three ingredients namely Flour, Sugar and Butter in the
standard proportions 5:3:2 respectively. However, the production process does not always
mix the ingredients in these proportions, but the cake can be sold if the mixture is within
certain limits.
The new production manager (a celebrity chef) has argued that the business should use only organic ingredients
in its cake production. Organic ingredients are more expensive but should produce a product with an improved
flavour and give health benefits for the customers. It was hoped that this would stimulate demand and enable
an immediate price increase for the cakes.

The standard prices for the ingredients are: Flour

- GH¢ 2.50 per kilo
Sugar - GH¢ 3.00 per kilo
Butter - GH¢ 2.00 per kilo

There is 5% normal loss in the production process.

The budget for production and sales in the period was 50,000 cakes. Actual production and sale of cake
mixture was 228,000 kg.
During the period the inputs were as follows:
Kg GH¢
Flour 96,000 249,600
Sugar 72,000 216,000
Butter 50,000 105,000

Page 9 of 21
Required:
Required:
Calculate the following variances:
i) Material Mix Variance (3 marks)
ii) Material yield variance (3 marks)
iii) Material usage variance (3 marks)

b) Differentiate between planning variances and operational variances. (2 marks)

Compiled by target 0507380935

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