Management Accounting

Week 8
Chapter 10: Flexible budgets, standard costs and variance
analysis

10.1 Which type of entities would be suited to the use of a standard cost
system?

An entity that has a repetitive type activity would be suited to a standard cost system.
As the activity will be repeated over and over again then it should be possible to
identify the resources necessary for the activity and then assign the cost of the
resource to calculate the standard cost.

10.2 Explain the difference between an ideal standard and a currently

attainable standard.

Ideal Standard: this standard assumes perfect operating conditions which achieve
maximum efficiency. No allowances are made for process errors. Such standards can
either motivate employees as it encourages higher levels of performance or
demotivate employees due to their frustration at not being able to meet the target set.

Currently Attainable Standard: this standard assumes 'normal' operating conditions

which allows employees to meet the targets set without a superhuman effort.
Obviously this standard has “inefficiencies” built in as it assumes less than 100%
efficiency in the process.

10.11 Distinguish between a price variance and an efficiency variance.

A price variance is the difference between standard and actual prices paid for
resources purchased and used in the production of goods or services. An efficiency
variance provides information about how economically direct resources such as
materials and labour were used.
 10.23 Calculation of budget variances
The accountant for Moon Industries has taken unexpected leave and has
not completed the end-ofperiod budget analysis. The following incomplete
budget analysis was found on her desk.

Additional information:

Required
(a) Complete the variance analysis report.
(b) Provide a brief report to management of any issues highlighted from
your analysis in (a).

(a)

Sales Units Budgeted Actual

Large 150 192
Small 333 490
Assumption no change in selling
price
Static Flexible
Variance Variance Actual
Budget Budget
$ $ $
Sales (small) 1,000,000 470000 1470000 0 1,470,000
Sales (large) 1,500,000 420000 1920000 0 1,920,000
Total Sales 2,500,000 890000 3390000 0 3,390,000
Variable Costs
Materials (small) 400,000 57,000 343000 -347,000 690,000
Labour (small) 200,000 4,000 196000 -134,000 330,000
Var. OH (small) 50,000 20,600 29400 -45,200 74,600
Materials (large) 350,000 -418,000 768000 258,000 510,000
Labour (large) 200,000 -184,000 384000 114,000 270,000
Var. OH (large) 30,000 -66,000 96000 60,600 35,400
Contribution Margin 1,270,000 -546,400 1816400 336,400 1,480,000
Fixed Costs

Manufacturing overhead 120,000 0 120,000 -60,000 180,000

Selling Expenses 50,000 0 50,000 -40,000 90,000

Admin Expenses 30,000 0 30,000 5,000 25,000
Net Profit 1,070,000 -546,400 1,616,400 431,400 1,185,000

(b) The budget analysis indicates a more favourable profit. This has come about due
to a number of factors. Firstly, the change in sales volume for both products. The
orignal static budget assumed a lower level of sales volume for each product. It can
also be seen from the flexible budget variance that the production department have a
favourable variance ($336 400) in relation to production costs. Althought higher
fixed costs were incurred overall the cost savings from production have more than
offset this increase.

Chapter 11: Variance analysis: revenue and cost

11.1 Discuss the three variances that help explain the sales volume variance.

The sales quantity (volume )variance reflects the difference between the standard
and actual quantity of units sold at the standard selling price. The sales volume
variance can be further explained by:

1. The market size variance – provides an indication of the proportion of the sales
volume variance that can be attributed to unexpected changes in market size
2. The market share variance – provides an indication of the proportion of the sales
volume variance that can be attributed to changes in the market share.
3. The product mix variance - provides an indication of changes in contribution
margin caused by selling in a different mix from the planned mix of products.

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11.8 Explain why variances for direct material and direct labour are separated
into price and efficiency variances.

Managers need information about the costs of direct materials and direct labour as
well as whether direct materials and labour have been used efficiently. If the price and
efficiency variances are combined, it is impossible to separate the causes of the
variance into potential changes in prices of direct materials (or the labour hourly
wage) and changes in the amount of materials (or labour hours) used to manufacture
the product. Managers need specific information to better monitor operations and
investigate changes.

11.22 Direct material variances

The Neon Manufacturing Company is a joint venture between Australian
and Chinese firms with an assembly plant located in Beijing. The
company’s managers expected to produce 20 000 units of product in
March. The standard cost for the materials used for 20 000 units is 173
600 yuan, and the standard cost per unit is 2.80 yuan per kilogram.
Actual production in March was 19 100 units. The company purchased
and used 57 300 kilograms of materials costing 163 305 yuan.

Required
(a) What was the standard quantity of kilograms per unit?
(b) What was the direct materials efficiency variance for March?
(c) What was the direct materials price variance for March?

(a) Standard quantity of kilograms per unit is calculated by dividing the total standard
cost by the expected number of units to determine the cost per unit then divide by the
2.80 yuan to determine the number of kilograms.

173600 yuan / 20 000 units = 8.68 yuan per unit / 2.80 yuan per kg = 3.1 kg per unit

(b) Direct material efficiency variance =

(actual quantity used for actual output – standard quantity allowed for actual output) x
standard price.

(57300 kgs – (19100 units x 3.1kgs)) x 2.80 yuan = 5348 yuan favourable
The variance is favourable as less material was used than expected.

(c) Direct material price variance =

(Actual price – Standard price) x quantity purchased
((163 305 yuan / 57300 kgs) – 2.80) x 57300 kgs = 2865 yuan unfavourable
Price paid of 2.85 yuan per kg is higher than expected price of 2.80 yuan
11.26 Direct materials and labour variances, variances to investigate
The managers of Bathroom Cabinets established the following standards
for Model 535:

Last month, 15 342 units of Model 535 were produced at a cost of $26 870
for direct materials and $47 000 for direct labour. A total of 13 252
kilograms of direct materials was used. Total direct labour hours
amounted to 2730 hours. During the same period, 110 000 kilograms of
direct material were purchased for $273 000. The entity’s policy is to
record materials price variances at the time materials are purchased.

Required
(a) What is the total standard cost for direct materials and direct
labour for the output this period?
(b) What was the direct materials price variance?
(c) What was the direct materials efficiency variance?
(d) What was the direct labour price variance?
(e) What was the direct labour efficiency variance?
(f) Identify any variances that are material (greater than 10 per cent of
total direct cost at standard). Discuss whether you would investigate
these variances.

(a) Standard costs for actual output of 15 342 units:

Direct materials (15 342 units × 0.8 kg × $2.00/kg) $24,547.20
Direct labour (15 342 units × 0.2 hr × $17.00/hour) 52 162.80
Total $76 710.00

(b) Direct materials price variance

Actual cost of purchases
$273 000
Standard cost for actual purchases ($2.00/kg × 110 000 kg) 220 000 F
Price variance $ 53000 U

(c) Direct materials efficiency variance

Actual quantity of materials used 13 252.0) kg
Standard quantity of materials for actual output (15 342 × 0.8 kg) 12 273.6) kg
Variance in kilograms (978.4) kg
Times standard cost per kilogram $2 Efficiency variance $(1 956.80) U

(d) Direct labour price variance

Actual labour cost 47 000U
Standard cost for actual labour hours ($17 × 2730 hours) $46,410 U
Price variance $ (590) U

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(e) Direct labour efficiency variance
Actual labour hours 2 730.0
Standard labour hours for actual output (15 342 × 0.2 hours) 3 068.4 F
F
Variance in hours 338.4 hours
Times standard cost per hour $17 F
Efficiency variance $5 752.80 F

(f) If managers use 10% of total direct costs as the criteria for investigation, then
the only variance requiring investigation is the direct material price variance of
$53000 unfavourable. In addition, the direct labour efficiency variance is
relatively large compared to total direct labour cost at 11%
($5752.80/$52 162.80). Some managers may want to investigate this variance,
especially if this company is concerned about quality as a strategy. If quality has
decreased as a result of this favourable variance, defective or low-quality units
could affect Nakatani’s reputation and future revenues if customers are
disgruntled. If production processes have improved, and there is no adverse
change in quality, so managers might want to change the labour quantity
standard.