Virtual Kollage: PRINCIPLES OF COST ACCOUNTING

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Posted by Chester Morton / Wednesday, 22 June 2016 / No comments

Cost Variance

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<b style="mso-bidi-font-weight: normal;">COST VARIANCES</b></div>
<div class="MsoNormal">
Cost variances can be divided into four categories.</div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l5 level1 lfo1; tab-stops: list .5in;">Direct
     Material Cost Variance</li>
</ul>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo2; tab-stops: list .5in;">Direct
     Labour Cost Variance</li>
</ul>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l8 level1 lfo3; tab-stops: list .5in;">Variable
     Overhead Cost Variance</li>
</ul>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Fixed
     Overhead Cost Variance</li>
</ul>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Variances occur generally as a result of the following
reasons:</div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Poor
     budgeting</li>
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Poor
     measurement or recording</li>
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Operational
     factors such as production efficiency, supervision, etc.</li>
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Random
     factors such as price level changes, political factors, technological
     factors, etc.</li>
</ul>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; mso-list: l9 level1 lfo5; tab-stops: list .25in; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">A.<span style="font: 7.0pt "Times New Roman";">   
</span></span></b><b style="mso-bidi-font-weight: normal;">Direct
Material Cost Variance</b>: It is the difference between the standard cost of
direct materials allowed or expected to be used for a given output and the
actual cost of direct materials used. That is,</div>
<div class="MsoNormal" style="margin-left: .25in;">
Direct Material Cost Variance =
(Standard Direct Material Cost) – (Actual Direct Material Cost) </div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
Standard cost of direct material
expected to be used for a given output produced can be calculated as shown;</div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Standard
     cost = (Actual output produced) × (standard materials allowed per unit of
     actual output) × (standard price of material)<span style="mso-spacerun: yes;">                                                                                                                                                 
     </span></li>
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Standard
     materials allowed for a given output = (Actual output produced)× (Standard
     materials allowed per unit of output)<span style="mso-spacerun: yes;">                                                                                                             
     </span><span style="mso-spacerun: yes;">   </span></li>
<li class="MsoNormal" style="mso-list: l11 level1 lfo4; tab-stops: list .5in;">Standard
     materials allowed are also called Standard Quantity.</li>
</ul>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u>EXAMPLE 1</u></b></div>
<div class="MsoNormal">
Calculate the standard materials allowed and the standard
cost from the following data in respect of Alex, production worker.</div>
<div class="MsoNormal">
Actual output produced in the past week<span style="mso-tab-count: 3;">                               </span>100 bottles</div>
<div class="MsoNormal">
Standard materials allowed per bottle produced<span style="mso-tab-count: 2;">                    </span>20 litres</div>
<div class="MsoNormal">
Standard price per litre of direct materials used<span style="mso-tab-count: 2;">                     </span>$700</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Solution</b></div>
<div class="MsoNormal">
Note that apart from the output produced, the other results
(20 litres and $700) are expected results. If Alex produced 100 bottles, he
would be expected to use 2,000 litres (i.e. 20×100) of the raw materials. Thus standard
direct materials allowed or expected = Actual output × Standard materials
allowed per bottle<span style="mso-tab-count: 3;">                               </span><span style="mso-tab-count: 5;">                                                            </span>
<span style="mso-spacerun: yes;"> </span>= 100 × 20<span style="mso-tab-count: 9;">                                                                                                     </span><span style="mso-tab-count: 5;">                                                            </span>
<span style="mso-spacerun: yes;"> </span>= <u>2,000 litres</u></div>
<div class="MsoNormal">
Standard cost of direct materials = Standard direct
materials allowed × Standard price per litre<span style="mso-tab-count: 3;">                             </span><span style="mso-tab-count: 4;">                                                </span><span style="mso-spacerun: yes;">     </span>= 2,000 × 700<span style="mso-tab-count: 9;">                                                                                                         </span><span style="mso-tab-count: 4;">                                                </span><span style="mso-spacerun: yes;">     </span>= <u>$1,400,000</u></div>
<div class="MsoNormal">
<span style="font-size: 8.0pt;"><span style="mso-spacerun: yes;">                                                                              
</span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
Direct Material Cost Variance can be sub-divided into:</div>
<div class="MsoNormal" style="margin-left: .3in; mso-list: l2 level1 lfo9; mso-text-indent-alt: -.2in; tab-stops: list .3in; text-indent: -.3in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">         
</span></span></b><b style="mso-bidi-font-weight: normal;">Direct
Material Price Variance</b>: It is the difference between the standard price
and the actual price for the actual quantity of materials used. That is,</div>
<div class="MsoNormal" style="margin-left: 33.0pt;">
<span style="mso-spacerun: yes;">      </span>Direct Material Price Variance =
(Standard Price –Actual Price) × Actual Direct Material Used</div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l4 level1 lfo6; tab-stops: list .5in;">Standard
     price of material is the price expected to be paid for every metre,
     kilogram, litre, etc of material purchased.</li>
</ul>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l5 level1 lfo1; tab-stops: 27.0pt list .5in; text-indent: -.25in;">
<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">  
</span></span></span><span style="mso-spacerun: yes;">   </span>Actual
price of material is the price actually paid for every metre, kilogram, litre,
etc of material purchased.<span style="mso-spacerun: yes;">            </span></div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
<b style="mso-bidi-font-weight: normal;">Causes of Material Price Variances</b></div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
The possible causes are:</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">         
</span>i.<span style="font: 7.0pt "Times New Roman";">    </span></span>poor
budgeting;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">        
</span>ii.<span style="font: 7.0pt "Times New Roman";">   </span></span>poor
recording or measurement;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>iii.<span style="font: 7.0pt "Times New Roman";">  </span></span>unexpected
price changes;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>iv.<span style="font: 7.0pt "Times New Roman";">  </span></span>different
source of supply;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">        
</span>v.<span style="font: 7.0pt "Times New Roman";">   </span></span>alteration
in quantity discounts;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l7 level2 lfo7; mso-text-indent-alt: -.25in; tab-stops: 27.0pt list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>vi.<span style="font: 7.0pt "Times New Roman";">  </span></span>substitution
of a different grade of material;</div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-list: l7 level2 lfo7; mso-text-indent-alt: -13.5pt; tab-stops: 27.0pt; text-indent: -27.0pt;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>vii.<span style="font: 7.0pt "Times New Roman";">    </span></span>standard
set at mid-year price leading to favourable price variance in early months and
adverse variance later.</div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: .3in; mso-list: l2 level1 lfo9; mso-text-indent-alt: -.2in; tab-stops: .25in list .3in left 45.0pt; text-indent: -.3in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";">       </span></span></b><b style="mso-bidi-font-weight: normal;">Direct Material Usage Variance</b>: It is
the difference between the standard quantity of direct materials allowed for
the actual production and the actual quantity of direct materials used, at
standard purchase price. That is,</div>
<div class="MsoNormal" style="margin-left: 51.0pt; tab-stops: .25in;">
Direct Material
Usage Variance = (Standard Direct Material Quantity – Actual Direct Material Quantity)
× Standard Price</div>
<div class="MsoNormal" style="margin-left: 51.0pt; tab-stops: .25in;">
<br /></div>
<div class="MsoNormal" style="tab-stops: .25in;">
<b style="mso-bidi-font-weight: normal;">Causes
of Material Usage Variance</b></div>
<div class="MsoNormal" style="tab-stops: .25in;">
This could be due to:</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">         
</span>i.<span style="font: 7.0pt "Times New Roman";">         
</span></span>poor planning;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">        
</span>ii.<span style="font: 7.0pt "Times New Roman";">        
</span></span>poor recording or measurement;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>iii.<span style="font: 7.0pt "Times New Roman";">       
</span></span>level of supervision;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>iv.<span style="font: 7.0pt "Times New Roman";">       
</span></span>usage of faulty machine or plant;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">        
</span>v.<span style="font: 7.0pt "Times New Roman";">        
</span></span>higher/lower incidence of scrap;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>vi.<span style="font: 7.0pt "Times New Roman";">       
</span></span>alteration to product design;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">      
</span>vii.<span style="font: 7.0pt "Times New Roman";">      
</span></span>substitution of a different grade of material;</div>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l10 level1 lfo8; mso-text-indent-alt: -.25in; tab-stops: .25in list .5in; text-indent: -.5in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">     
</span>viii.<span style="font: 7.0pt "Times New Roman";">     
</span></span>substitution of a different grade of employees.</div>
<div class="MsoNormal" style="tab-stops: .25in;">
<br /></div>
<h3 style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .25in; margin-right: 0in; margin-top: 0in; mso-list: l9 level1 lfo5; tab-stops: 9.0pt list .25in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">B.<span style="font: 7.0pt "Times New Roman";">     </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Direct Labour
Cost Variance</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; font-weight: normal;">: It is the difference between
the standard direct labour cost and the actual direct labour cost incurred for
the actual production achieved. That is,</span></h3>
<div class="MsoNormal" style="margin-left: .25in;">
Direct Labour Cost Variance =
(Standard Direct Labour Cost) – (Actual Direct Labour Cost)</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
Standard cost of direct labour
expected to be incurred for a given output produced can be calculated as shown;</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">      </span>Standard cost = Standard
hours allowed × Standard rate per hour<span style="mso-spacerun: yes;">                                                                                                                                                  
</span></div>
<div class="MsoNormal" style="margin-left: .25in;">
Standard hours allowed = Actual
output produced × Standard direct labour hours allowed per unit</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Following from the example above in respect of Alex,
assuming </div>
<div class="MsoNormal">
Actual output produced in the past week was still<span style="mso-tab-count: 3;">                             </span>100 bottles</div>
<div class="MsoNormal">
Direct labour hour allowed per bottle is<span style="mso-tab-count: 4;">                                             </span>2
hours</div>
<div class="MsoNormal">
Standard direct labour rate per hour is<span style="mso-tab-count: 4;">                                               </span>$8,000<span style="mso-tab-count: 1;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Solution</b></div>
<div class="MsoNormal">
If Alex produced 100 bottles, he would be expected to use
200 (i.e. 20×100) of direct labour hours. That is,<span style="mso-spacerun: yes;">    </span></div>
<div class="MsoNormal">
Standard direct labour hours expected/allowed = Actual
output × Standard direct labour hours per bottle</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">                                                                          
</span>= 100 × 2</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">                                                                          
</span>= <u>200 hours</u></div>
<div class="MsoNormal">
Standard direct labour Cost = Standard direct labour hours
allowed × Standard direct labour rate per hour </div>
<div class="MsoNormal">
<span style="mso-tab-count: 3;">                                    </span><span style="mso-spacerun: yes;">         </span>= 200 × 8,000<span style="mso-tab-count: 10;">                                                                                                                 </span></div>
<div class="MsoNormal" style="tab-stops: 2.0in;">
<span style="mso-spacerun: yes;">                                             </span>= <u>$1,600,000</u></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="tab-stops: .25in .5in;">
Direct Labour Cost Variance can
be sub-divided into:</div>
<div class="MsoNormal" style="margin-left: .3in; mso-list: l1 level1 lfo10; mso-text-indent-alt: -.2in; tab-stops: list .3in; text-indent: -.3in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">         
</span></span></b><b style="mso-bidi-font-weight: normal;">Direct
Labour Rate Variance</b>: It is the difference between the standard and the
actual direct labour hour rate, for the total hours actually worked. That is,</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">            </span>Direct Labour
Rate Variance = (Standard Direct Labour Hour Rate –Actual Direct Labour Hour
Rate) ×</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">            </span>Actual
Direct Labour Hours Worked</div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l4 level1 lfo6; tab-stops: list .5in;">Standard
     direct labour hour rate is the rate expected to be paid for every direct
     labour hour worked.</li>
</ul>
<div class="MsoNormal" style="margin-left: .5in; mso-list: l5 level1 lfo1; tab-stops: 27.0pt list .5in; text-indent: -.25in;">
<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">  
</span></span></span><span style="mso-spacerun: yes;">   </span>Actual direct
labour hour rate is the rate actually paid for every direct labour hour worked.</div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
<b style="mso-bidi-font-weight: normal;"><u>Causes of Labour Rate Variance</u></b></div>
<div class="MsoNormal" style="tab-stops: 27.0pt;">
The possible causes are:</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l1 level2 lfo10; mso-text-indent-alt: -.1in; tab-stops: list .35in left 27.0pt; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>i.<span style="font: 7.0pt "Times New Roman";">     </span></span>poor
planning;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l1 level2 lfo10; mso-text-indent-alt: -.1in; tab-stops: list .35in left 27.0pt; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">     
</span>ii.<span style="font: 7.0pt "Times New Roman";">     </span></span>poor
recording or measurement;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l1 level2 lfo10; mso-text-indent-alt: -.1in; tab-stops: list .35in left 27.0pt; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>iii.<span style="font: 7.0pt "Times New Roman";">     </span></span>unexpected
wage award;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l1 level2 lfo10; mso-text-indent-alt: -.1in; tab-stops: list .35in left 27.0pt; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>iv.<span style="font: 7.0pt "Times New Roman";">     </span></span>overtime
or bonus payments different from plan;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l1 level2 lfo10; mso-text-indent-alt: -.1in; tab-stops: list .35in left 27.0pt; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">     
</span>v.<span style="font: 7.0pt "Times New Roman";">     </span></span>substitution
of a different grade of labour.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .3in; mso-list: l1 level1 lfo10; mso-text-indent-alt: -.2in; tab-stops: list .3in; text-indent: -.3in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";">         
</span></span></b><b style="mso-bidi-font-weight: normal;">Direct
Labour Efficiency Variance</b>: It is the difference between the standard hours
required for the actual production achieved and the hours actually worked,
valued at standard direct labour hour rate. That is, </div>
<div class="MsoNormal" style="margin-left: .25in;">
<span style="mso-spacerun: yes;">      </span>Direct Labour Rate Variance = (Standard
Direct Labour Hours – Actual Direct Labour Hours) × </div>
<div class="MsoNormal" style="margin-left: .25in;">
<span style="mso-spacerun: yes;">      </span>Standard Direct Labour Hour Rate</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u>Causes of Labour
Efficiency Variance</u></b></div>
<div class="MsoNormal">
The possible causes are:</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">       
</span>i.<span style="font: 7.0pt "Times New Roman";">     </span></span>poor
planning;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">     
</span>ii.<span style="font: 7.0pt "Times New Roman";">     </span></span>poor
recording or measurement;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>iii.<span style="font: 7.0pt "Times New Roman";">     </span></span>level
of supervision;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>iv.<span style="font: 7.0pt "Times New Roman";">     </span></span>working
conditions including workshop organisation;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">     
</span>v.<span style="font: 7.0pt "Times New Roman";">     </span></span>consequences
of the learning effect;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">   
</span>vi.<span style="font: 7.0pt "Times New Roman";">     </span></span>introduction
of incentive scheme or staff training;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">  </span>vii.<span style="font: 7.0pt "Times New Roman";">     </span></span>efficiency
of machine;</div>
<div class="MsoNormal" style="margin-left: .35in; mso-list: l6 level1 lfo11; mso-text-indent-alt: -.1in; tab-stops: list .35in; text-indent: -.35in;">
<span style="mso-list: Ignore;">viii.<span style="font: 7.0pt "Times New Roman";">    
</span></span>substitution of a different grade of labour.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Where the hours recorded or clocked by employees are more
than the actual hours worked, idle time is recorded. This will lead to <b style="mso-bidi-font-weight: normal;">idle time variance</b>. This is calculated
by multiplying the idle hours by the standard labour rate thus, </div>
<div class="MsoNormal">
Idle Time Variance = Idle hours × Standard labour rate </div>
<div class="MsoNormal">
Idle time variance is always adverse.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">EXERCISE 1</b></div>
<div class="MsoNormal">
Joy Company manufactures one standard product. The standard
cost of producing one unit is calculated as follows:<span style="mso-tab-count: 6;">                                                                        </span><span style="mso-spacerun: yes;">   </span><span style="mso-spacerun: yes;">         </span><span style="mso-spacerun: yes;"> </span>$</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Materials:
20 kg @ $300 per kg<span style="mso-tab-count: 1;">          </span><span style="mso-spacerun: yes;">          </span>6,000</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Labour: 6
hours @ $250 per hour<span style="mso-tab-count: 1;">       </span><span style="mso-spacerun: yes;">          </span><u><span style="mso-spacerun: yes;">  </span>1,500</u></div>
<div class="MsoNormal" style="margin-left: 3.0in; text-indent: .5in;">
7,500</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Production
overheads<span style="mso-tab-count: 3;">                         </span><span style="mso-spacerun: yes;">          </span><u><span style="mso-spacerun: yes;">  </span>2,500</u></div>
<div class="MsoNormal">
<span style="mso-tab-count: 6;">                                                                        </span><span style="mso-spacerun: yes;">          </span><u style="text-underline: double;">10,000</u></div>
<div class="MsoNormal">
For the month of October 1994, 800 units were produced. A
total of 14,400 kg of materials were bought and used at a total cost of $5,040,000.
A total of $1,120,000 was paid as wages for the 4,000 labour hours used in the
month.</div>
<div class="MsoNormal">
You are required to calculate:</div>
<div class="MsoNormal">
(a) Total Material Cost Variance analysed into Price
Variance and Usage Variance;</div>
<div class="MsoNormal">
(b) Total Labour Cost Variance analysed into Rate Variance
and Efficiency Variance.<span style="mso-spacerun: yes;">           </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">EXERCISE 2</b></div>
<div class="MsoNormal">
An extract of a standard cost card for one tonne of a
product called Zain is as below:</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;">   </span><span style="mso-tab-count: 2;">                     </span><span style="mso-tab-count: 5;">                                                            </span><span style="mso-spacerun: yes;">    </span>$</div>
<div class="MsoNormal" style="text-indent: .5in;">
Direct material: 50kg @ $100 per kg<span style="mso-tab-count: 2;">              </span>5,000</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Direct
labour: 10 hours @ $800 per hour<span style="mso-tab-count: 1;">       </span>8,000
</div>
<div class="MsoNormal">
During April 2009, 70 tonnes of Zain was produced. Other
costs were:</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Direct
material: 3,200kg costing $384,000</div>
<div class="MsoNormal">
<span style="mso-tab-count: 1;">            </span>Direct labour:
800 hours costing $608,000.</div>
<div class="MsoNormal">
You are required to calculate:</div>
<div class="MsoNormal">
(a) direct material price variance;</div>
<div class="MsoNormal">
(b) direct material usage variance;</div>
<div class="MsoNormal">
(c) total direct material cost variance;</div>
<div class="MsoNormal">
(d) total direct labour cost variance;</div>
<div class="MsoNormal">
(e) direct labour rate variance;</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
(f) direct labour efficiency
variance.</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .25in; mso-list: l9 level1 lfo5; tab-stops: list .25in left 441.0pt; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">C.<span style="font: 7.0pt "Times New Roman";">    </span></span></b><b style="mso-bidi-font-weight: normal;">Fixed Production Overhead Variances<span style="mso-tab-count: 1;">                                                                            </span>
</b></div>
<div class="MsoListParagraph" style="margin-left: .25in; tab-stops: 441.0pt;">
The overall
fixed overhead variance is the <b style="mso-bidi-font-weight: normal;">fixed
overhead total variance</b>. It is the difference between fixed overhead
incurred (actual fixed overhead) and fixed overhead absorbed. This is the same
as the fixed overhead under- or over-absorbed.</div>
<div class="MsoListParagraph" style="margin-left: .25in; tab-stops: 441.0pt;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .25in; tab-stops: 441.0pt;">
It is
calculated as; </div>
<div class="MsoListParagraph" style="margin-left: .25in; tab-stops: 441.0pt;">
Fixed
overhead total variance = Fixed overhead absorbed – Fixed overhead incurred</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
Fixed overhead
absorbed is calculated as;</div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
Fixed overhead
absorbed = Actual output × Standard hours per unit × Fixed overhead absorption
rate per hour</div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
Fixed overhead
total variance can be sub-divided into fixed overhead <b style="mso-bidi-font-weight: normal;">expenditure</b> variance and fixed overhead <b style="mso-bidi-font-weight: normal;">volume</b> variance.</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt; text-indent: -13.5pt;">
<b style="mso-bidi-font-weight: normal;">1. Fixed Overhead Expenditure
Variance</b>:<b style="mso-bidi-font-weight: normal;"> </b>This is the difference
between budgeted fixed overhead expenditure and actual fixed overhead
expenditure. Thus,</div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt; text-indent: -13.5pt;">
<span style="mso-spacerun: yes;">     </span>Fixed overhead expenditure
variance = Budgeted fixed overhead – Fixed overhead incurred</div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<b style="mso-bidi-font-weight: normal;">2</b>. <b style="mso-bidi-font-weight: normal;">Fixed
Overhead Volume Variance</b>: This is the difference between actual and budgeted
volume of output </div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-spacerun: yes;">    </span></b>multiplied
by the standard fixed overhead absorption rate per unit of output. Thus,</div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<span style="mso-spacerun: yes;">    </span>Fixed overhead volume variance = (Actual
output – Budgeted output) Standard fixed overhead rate per unit</div>
<div class="MsoNormal" style="margin-left: .25in; tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt;">
It can also be
calculated as;</div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt;">
Fixed overhead
volume variance = (Standard hours – Budgeted hours) Standard fixed overhead
rate per hour</div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-left: 31.5pt; tab-stops: 441.0pt;">
Fixed overhead
volume variance can be sub-divided into fixed overhead <b style="mso-bidi-font-weight: normal;">volume capacity</b> variance and fixed overhead <b style="mso-bidi-font-weight: normal;">volume efficiency </b>variance.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoListParagraph" style="margin-left: 49.5pt; mso-list: l7 level4 lfo7; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">a.<span style="font: 7.0pt "Times New Roman";">     
</span></span></b><b style="mso-bidi-font-weight: normal;">Fixed
Overhead Capacity Variance: </b>This is the difference between actual hours
worked and budgeted hours, valued at fixed overhead absorption rate per hour. </div>
<div class="MsoNormal">
<span style="font-size: 8.0pt;"><span style="mso-tab-count: 1;">                </span></span><span style="font-size: 5.0pt;"></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-indent: 13.5pt;">
i.e. Fixed
overhead capacity variance = (Actual Hours Worked – Budgeted Hours) Fixed
overhead rate </div>
<div class="MsoNormal" style="margin-left: .5in; text-indent: 13.5pt;">
<span style="mso-spacerun: yes;">      </span><span style="mso-spacerun: yes;">                                                                                                                                 </span>per
hour<span style="font-size: 8.0pt;"></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoListParagraph" style="margin-left: 49.5pt; mso-list: l7 level4 lfo7; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">b.<span style="font: 7.0pt "Times New Roman";">     
</span></span></b><b style="mso-bidi-font-weight: normal;">Fixed
Overhead Efficiency Variance: </b>This is the difference between standard hours
worked (i.e. hours that actual production should have taken) and actual hours
worked, valued at fixed overhead absorption rate per hour. </div>
<div class="MsoNormal">
<span style="font-size: 8.0pt;"><span style="mso-tab-count: 1;">                </span></span></div>
<div class="MsoNormal" style="margin-left: 49.5pt;">
i.e. Fixed overhead efficiency
variance = </div>
<div class="MsoNormal" style="margin-left: 49.5pt;">
<span style="mso-spacerun: yes;">      </span>(Standard Hours of Actual production –
Budgeted Hours) Fixed overhead absorption rate per hour</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .25in; mso-list: l9 level1 lfo5; tab-stops: list .25in; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">D.<span style="font: 7.0pt "Times New Roman";">    </span></span></b><b style="mso-bidi-font-weight: normal;">Variable Production Overhead Variances</b></div>
<div class="MsoNormal" style="margin-left: .25in;">
The behaviour of variable costs,
compared with fixed costs, calls for different techniques when analysing
variable overhead variances. Variable overheads are expected to change with the
level of activity while fixed overheads are expected to remain the same
regardless of the level of production. </div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoListParagraph" style="mso-list: l3 level1 lfo12; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">      </span></span></b><b style="mso-bidi-font-weight: normal;">Variable Overhead Total Variance: </b>This
is the difference between variable overhead absorbed and actual variable
overhead incurred. It can be calculated as below;</div>
<div class="MsoListParagraph">
Variable overhead total variance = Variable overhead
absorbed – Actual variable overhead incurred</div>
<div class="MsoListParagraph">
<br /></div>
<div class="MsoListParagraph">
Variable overhead absorbed = Actual output × Standard
hours per unit × Variable overhead absorption rate <span style="mso-spacerun: yes;">                             </span></div>
<div class="MsoListParagraph">
<span style="mso-spacerun: yes;">                            </span><span style="mso-spacerun: yes;">                                                                                            </span>per
hour</div>
<div class="MsoListParagraph">
<br /></div>
<div class="MsoListParagraph">
The variable overhead total variance can be divided
into <b style="mso-bidi-font-weight: normal;">variable overhead expenditure</b>
and <b style="mso-bidi-font-weight: normal;">variable overhead efficiency</b>
variances.</div>
<div class="MsoListParagraph">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .75in; mso-list: l9 level2 lfo5; tab-stops: list .75in; text-indent: -.25in;">
<span style="mso-list: Ignore;">a.<span style="font: 7.0pt "Times New Roman";">      
</span></span><b style="mso-bidi-font-weight: normal;">Variable
Overhead Expenditure:</b> This is the difference between the variable overhead
that should have been incurred for the actual hours worked (i.e. standard
variable overhead) and the actual variable overhead incurred. That is;</div>
<div class="MsoListParagraph" style="margin-left: .75in;">
Variable overhead
expenditure variance = Standard variable overhead – Actual variable overhead </div>
<div class="MsoListParagraph" style="margin-left: .75in;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .75in;">
Standard variable overhead
= Actual hours worked × Variable overhead absorption rate</div>
<div class="MsoListParagraph" style="margin-left: .75in;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: .75in; mso-list: l9 level2 lfo5; tab-stops: list .75in; text-indent: -.25in;">
<span style="mso-list: Ignore;">b.<span style="font: 7.0pt "Times New Roman";">     
</span></span><b style="mso-bidi-font-weight: normal;">Variable
Overhead Efficiency Variance: </b>This is the difference between standard hours
and actual hours worked for the actual output produced, valued at the variable
overhead absorption rate. That is,</div>
<div class="MsoListParagraph" style="margin-left: .75in;">
Variable overhead
efficiency variance = (Standard hours – Actual hours) Variable overhead
absorption rate</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">EXERCISE 3</b></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
The standard cost card of Beware
Enterprise for product Dragon is shown below:</div>
<table border="0" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; margin-left: .2in; mso-border-insideh: none; mso-border-insidev: none; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;">
 <tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
$</div>
</td>
 </tr>
<tr style="mso-yfti-irow: 1;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Direct material</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(5kg @ $4)</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
20</div>
</td>
 </tr>
<tr style="mso-yfti-irow: 2;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Direct labour</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(7hours @ $3)</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
<u>21</u></div>
</td>
 </tr>
<tr style="mso-yfti-irow: 3;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Prime cost</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
41</div>
</td>
 </tr>
<tr style="mso-yfti-irow: 4;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Variable overhead</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(7hours @ $6)</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
42</div>
</td>
 </tr>
<tr style="mso-yfti-irow: 5;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Fixed overhead</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(5hours @ $8)</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<u><span style="mso-spacerun: yes;">  </span>56</u></div>
</td>
 </tr>
<tr style="mso-yfti-irow: 6;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Total standard cost</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
Standard profit</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
Standard selling price</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
139</div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<span style="mso-spacerun: yes;"> 
  </span><u>11</u></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<u style="text-underline: double;">150</u></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
<tr style="mso-yfti-irow: 7;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Budgeted output was </div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
13,500 units</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
<tr style="height: 4.5pt; mso-height-rule: exactly; mso-yfti-irow: 8; mso-yfti-lastrow: yes;">
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
</tbody></table>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
In the course of operating
activities, it was realized that the above standards failed to take certain
factors into consideration which would have made the standard cost card look as
below</div>
<table border="0" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; margin-left: .2in; mso-border-insideh: none; mso-border-insidev: none; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;">
 <tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div align="center" class="MsoNormal" style="tab-stops: 441.0pt; text-align: center;">
$</div>
</td>
 </tr>
<tr style="mso-row-margin-right: .5in; mso-yfti-irow: 1;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Direct material</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(4kg @ $6)</div>
</td>
  <td style="border: none; mso-cell-special: placeholder; padding: 0in 0in 0in 0in;" width="48"><div class="MsoNormal">
<br /></div>
</td>
 </tr>
<tr style="mso-row-margin-right: .5in; mso-yfti-irow: 2;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Direct labour</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(6hours @ $4)</div>
</td>
  <td style="border: none; mso-cell-special: placeholder; padding: 0in 0in 0in 0in;" width="48"><div class="MsoNormal">
<br /></div>
</td>
 </tr>
<tr style="mso-row-margin-right: .5in; mso-yfti-irow: 3;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Prime cost</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="border: none; mso-cell-special: placeholder; padding: 0in 0in 0in 0in;" width="48"><div class="MsoNormal">
<br /></div>
</td>
 </tr>
<tr style="mso-row-margin-right: .5in; mso-yfti-irow: 4;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Variable overhead</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(9hours @ $8)</div>
</td>
  <td style="border: none; mso-cell-special: placeholder; padding: 0in 0in 0in 0in;" width="48"><div class="MsoNormal">
<br /></div>
</td>
 </tr>
<tr style="mso-row-margin-right: .5in; mso-yfti-irow: 5;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Fixed overhead</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
(8hours @ $5)</div>
</td>
  <td style="border: none; mso-cell-special: placeholder; padding: 0in 0in 0in 0in;" width="48"><div class="MsoNormal">
<br /></div>
</td>
 </tr>
<tr style="mso-yfti-irow: 6;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
Standard profit</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<u>25</u></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
<tr style="mso-yfti-irow: 7;">
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
Budgeted output was </div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
13,500 units</div>
</td>
  <td style="padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
<tr style="height: 4.5pt; mso-height-rule: exactly; mso-yfti-irow: 8; mso-yfti-lastrow: yes;">
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: 118.15pt;" valign="top" width="158"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: 85.5pt;" valign="top" width="114"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
  <td style="height: 4.5pt; mso-height-rule: exactly; padding: 0in 5.4pt 0in 5.4pt; width: .5in;" valign="top" width="48"><div class="MsoNormal" style="tab-stops: 441.0pt;">
<br /></div>
</td>
 </tr>
</tbody></table>
<div class="MsoNormal" style="tab-stops: 441.0pt;">
Required: Calculate </div>
<div class="MsoNormal">
1. (a) direct material price variance;<span style="mso-tab-count: 1;">    </span>(b) direct material usage variance;<span style="mso-tab-count: 1;">      </span>(c) total direct material cost variance;</div>
<div class="MsoNormal">
(d) total direct labour cost variance;<span style="mso-tab-count: 1;">   </span>(e) direct labour rate variance;<span style="mso-tab-count: 1;">            </span>(f) direct labour efficiency
variance.</div>
<div class="MsoNormal">
(g) Fixed overhead total variance<span style="mso-tab-count: 1;">       </span>(h) Fixed overhead expenditure variance<span style="mso-spacerun: yes;">    </span>(i) Fixed overhead volume variance</div>
<div class="MsoNormal">
(k) Fixed overhead capacity variance (l) Fixed overhead
efficiency variance<span style="mso-spacerun: yes;">       </span>(m) Variable
overhead total variance<span style="mso-spacerun: yes;">   </span>(n) Variable
overhead expenditure variance<span style="mso-tab-count: 1;">   </span><span style="mso-spacerun: yes;">  </span>(o) Variable overhead efficiency variance. (
p) Total sale Variance</div>
<div class="MsoNormal">
(q) sales volume profit variance<span style="mso-spacerun: yes;">   </span>(r) sale <span style="mso-spacerun: yes;"> </span>price variance</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
2. a. Planning Direct Material cost variance<span style="mso-spacerun: yes;">    </span>b. Operational Direct material cost
variance c. Planning direct material price variance d. planning direct material
usage variance e. Operating direct material price variance <span style="mso-spacerun: yes;"> </span>f. Operating material usage variance<span style="mso-spacerun: yes;">  </span>g. Planning Direct labour cost variance<span style="mso-spacerun: yes;">  </span>h. Operating direct labour cost variance i.
Planning labour rate variance j. Planning labour efficiency variance<span style="mso-spacerun: yes;">    </span>k. Operating labour rate variance<span style="mso-spacerun: yes;">      </span>L. Operating labour efficiency variance </div>

Cost Variance

COST VARIANCES Cost variances can be divided into four categories. Direct Material Cost Variance Direct Labour Cos...

Standard costing

<div class="separator" style="clear: both; text-align: center;">
</div>
<br />

<br />
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHc7X8X7FmTYJ6M0CLc2G7sra36b6OEFtKuJ61dhQfnIkkYr9oPO0GtXkf1V1BcKF7auWh5lQ8ywyGs6WTojz0wU0PMR4ZO8AbCkbMPYejEbIScJU4bg_g4Z-naaC60mHfAuFtfbHVs9Ez/s1600/standard.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="212" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHc7X8X7FmTYJ6M0CLc2G7sra36b6OEFtKuJ61dhQfnIkkYr9oPO0GtXkf1V1BcKF7auWh5lQ8ywyGs6WTojz0wU0PMR4ZO8AbCkbMPYejEbIScJU4bg_g4Z-naaC60mHfAuFtfbHVs9Ez/s320/standard.jpg" width="320" /></a></div>
<b style="mso-bidi-font-weight: normal;">STANDARD COSTING AND
VARIANCE ANALYSIS</b></div>
<div class="MsoNormal">
This refers to a costing technique that is used to establish the
predetermined cost of products or services and compares the predetermined cost
with actual cost incurred to determine any variances.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Standard cost is used as the basis of standard costing and
variance analysis. Standard Cost can be defined as a predetermined unit cost of
a product or service which is expected to be incurred under efficient operating
conditions.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It must be noted that standard cost is different from
budgeted cost. This is because whilst standard cost is a predetermined unit
cost, budgeted cost is a predetermined total cost of an activity which is
compiled from the totals of standard costs. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Standard costs are normally established for all the elements
of cost (i.e., material, labour and expenses) and finally summed up to
constitute a budget.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Processes Involved in
Standard Costing</b></div>
<div class="MsoNormal">
The following steps must be followed when operating a
Standard Costing System:</div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l3 level1 lfo1; tab-stops: list .5in;">Establishment
     of standard costs for each element of cost. </li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo1; tab-stops: list .5in;">Measurement
     or recording of actual results.</li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo1; tab-stops: list .5in;">Comparison
     of actual results with standard costs to measure any variances which have
     occurred.</li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo1; tab-stops: list .5in;">Analysis
     of variances (i.e., into price, usage, efficiency, etc variances).</li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo1; tab-stops: list .5in;">Investigation
     of variances and the taking of remedial or corrective actions.<span style="mso-tab-count: 4;">                                     </span></li>
</ol>
<div class="MsoNormal">
<span style="font-size: 6.0pt;"> </span>Remedial action must be taken <b style="mso-bidi-font-weight: normal;">in all instances</b> when standard performance and actual performance
are not equal. That is whether a particular variance is favourable or adverse,
it must be investigated.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Cost Variance</b>
refers to the difference between actual cost and budgeted/standard cost.
Variance is said to be favourable if it will lead to an increase in profit. It
is however said to be unfavourable or adverse if it reduces profit.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Variance Analysis</b>
refers to the examination of the difference between actual and standard/budgeted
results so as to take a corrective action on time.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u>Types of Standard</u></b></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l1 level1 lfo2;">Ideal Standards: These standards
     that can be attained under the most favourable conditions, with no allowance
     for normal losses, waste and machine down time. Ideal standards are not
     widely used in practice because they may demotivate employees. They are also
     called Potential Standards. Japanese companies normally use this type of
     standards to identify areas where efficient use of resources can lead to
     large savings in cost.</li>
</ol>
<div class="MsoNormal" style="margin-left: .5in;">
<br /></div>
<ol start="2" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l1 level1 lfo2;">Basic Standards: These are
     standards established for use over a long period from which current
     standards can be developed. The main purpose is to use them to show trends
     over a period of time.</li>
</ol>
<div class="MsoNormal">
<br /></div>
<ol start="3" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l1 level1 lfo2;">Current Standard: It is a
     standard established for use over a short period of time and relates to
     current conditions.</li>
</ol>
<div class="MsoNormal">
<br /></div>
<ol start="4" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l1 level1 lfo2;">Attainable Standards: This is any level of measurement that be attained if a standard unit of work is
     carried out efficiently, a machine properly operated or material properly
     used. It is also called Expected Standard. This type of standard makes
     allowances for normal losses, waste and machine down time or machine
     breakdown. Attainable standard motivates employees since it is realistic.
     It is therefore used to prepare budgets.</li>
</ol>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Objectives of
Standard Costing</b></div>
<div class="MsoNormal">
The objectives include the following</div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Provide
     a basis for cost control. That is it indicates what is attainable and what
     is being attained.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Expose
     operations or areas of a business where efficiency or inefficiency is
     being attained.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Assist
     in the evaluation of performance variations or deviations for the purpose
     of revising estimates or standards.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Enable
     corrective action to be taken on time.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Provide
     a basis for stack valuation.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Provide
     a basis for the preparation of budgets</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">
      
      
      
       
       <table cellpadding="0" cellspacing="0" style="width: 100%px;">
        <tbody>
<tr>
         <td><div>
<div align="center" class="MsoNormal" style="mso-layout-grid-align: none; text-align: center; text-autospace: none;">
<span style="color: black; font-family: "arial" , "sans-serif"; font-size: 44.0pt;"><br /></span></div>
</div>
</td>
        </tr>
</tbody></table>
Assist in the establishment of selling prices.</li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo3; tab-stops: list .5in;">Encourage
     participation of all employees in setting standards and establishing
     budgets.</li>
</ol>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Advantages of
Standard Costing</b></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">It
     serves as a basis for budgeting and planning.</li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">It
     promotes management by exception. That is management can focus on only
     activities which are not proceeding significantly according to plan.</li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">Variance
     analysis may result in cost reduction techniques being proposed and
     followed up. That is, it stimulates cost consciousness.</li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">It
     provides basis for product pricing and stock valuation.</li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">Standard
     cost provides a yard stick against which actual cost or performance can be
     measured.</li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo4; tab-stops: list .5in;">Full
     participation of all employees and the setting of realistic standards will
     lead to motivation of staff.</li>
</ol>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;">Disadvantages of
Standard Costing</b></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">It may
     be time consuming and expensive to operate.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">It may
     concentrate on only aspects of a business which can be quantified in
     monetary terms.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">It may
     stifle initiative.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">Standards
     set will be rendered out of date in volatile conditions i.e., where
     prices, production methods, etc are changing rapidly.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">The
     system may be so complex that it will be difficult to understand by line
     managers.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">It
     does not allow for flexibility.</li>
<li class="MsoNormal" style="mso-list: l4 level1 lfo5; tab-stops: list .5in;">It is
     difficult to use where non-standardized products or operations are
     involved.</li>
</ol>

Standard costing

STANDARD COSTING AND VARIANCE ANALYSIS This refers to a costing technique that is used to establish the predetermined cost of pro...

Forestry

Virtual Kollage

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Cost Variance

Standard costing

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