QUESTION 2

A company produces and sells a product called Widget. The standard cost for the product is
as follows:
Direct material
Direct labour
Variable OH
Fixed OH
Total standard cost per unit

4 kg @ RM5 per kg
3 hours @ RM7 per hour

RM
20.00
21.00
15.00
12.00
68.00

The planned annual production and sales was 12,000 units and the standard selling price
was RM90 per unit. All overheads are absorbed based on direct labour hours.
At the end of March, actual results were:
Production
Sales
Direct material
Direct labour
Overheads

1,150 units
RM101,775
4,800 kg was purchased at the cost of RM28,800
3,500 hours worked at the cost of RM22,750
Variable RM16,520
Fixed RM17,000

There is no opening and closing inventory for material and finished goods.
Required:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.

a) Calculate the following variances for March:

Direct material price variance
Direct material usage variance
Direct labour rate variance
Direct labour efficiency variance
Variable overhead expenditure variance
Variable overhead efficiency variance
Fixed overhead expenditure variance
Fixed overhead volume variance
Sales margin price variance
Sales margin volume variance

(16 marks)

b) Calculate the actual profit for March and prepare a reconciliation statement for the
month.
(6 marks)
c) Explain three reasons why businesses normally determine the standard costs of
products before the actual production begins.
(3 marks)

SOLUTION

QUESTION 1
i)

a) Variances
Direct material price variance
= (SP AP) x AQ purchased
= [(5 (28,800/4,800)] x 4,800
= (5 - 6) x 4,800
= RM4,800 (A)

ii)

Direct material usage variance

= (SQ AQ) x SP
= [(4 x 1,150) 4,800] x 5
= (4,600 4,800) x 5
= RM1,000 (A)

iii)

Direct labour rate variance

= (SR AR) x AH
= [7 (22,750/3,500)] x 3,500
= (7 6.5) x 3,500
= RM1,750 (F)

iv)

Direct labour efficiency variance

= (SH AH) x SR
= [(3 x 1,150) 3,500] x 7
= (3,450 3,500) x 7
= RM3,50 (A)

v)

Variable overhead expenditure variance

= Absorbed VOH Actual VOH
= (Actual hours x VOH abs rate) Actual VOH
= (3,500 x 5) 16,520
= 17,500 16,520
= RM980 (F)

vi)

Variable overhead efficiency variance

= (SH AH) x VOH abs rate
= (3,450 3,500) x 5
= RM2,50 (A)

vii)

Fixed overhead expenditure variance

= Bud FOH Actual FOH
= [(12,000/12) x 12] 17,000
= 12,000 17,000
= RM5,000 (A)
viii)

Fixed overhead volume variance

= (Budgeted output Actual output) x FOH abs rate/unit
= (1,000 1,150) x 12
= RM1,800 (F)

ix)

Sales margin price variance

* Std margin = 90 68 = 22
* Actual margin = (101,775/1,150) 68 = 20.5

= (Std margin - Actual margin) x Actual Sales Volume

= (22 20.5) x 1,150
= RM1,725 (A)
x)

Sales margin volume variance

= (Bud SV Act SV) x Std margin
= (1,000 1,150) x 22
= 150 x 22
= RM3,300 (F)
(16 marks)

b) Actual profit:
Sales
(-) Costs:
Direct material
Direct labour
VOH
FOH
NP

101,775
28,800
22,750
16,520
17,000

(85,070)
16,705

d) Reconciliation statement:
Fav

RM
Adv

Budgeted profit (1,000 x 22)

Sales variances
Sales margin price
Sales margin volume

22,000
1,725
3,300

DM variances
DM price
DM usage
DL variances
DL rate variance
DL efficiency
VOH variances
VOH expenditure
VOH efficiency
FOH variances
FOH expenditure
FOH volume
Actual profit

4,800
1,000
1,750
350
980
250
5,000
1,800
7,830

13,125

5,295(A)
16,705

[TOTAL: 25 MARKS]