Variances Analysis Practice Questions

Question 1
Standard Cost for Product RBT
$
Materials (10kg x $8 per kg) 80
Labour (5hrs x $6 per hr) 30
Variable Overheads (5hrs x $8 per hr) 40
Fixed Overheads (5hrs x $9 per hr) 45
195

Budgeted Results
Production 10,000 units
Sales 7,500 units
Selling Price $300 per unit

Actual Results
Production 8,000 units
Sales 6,000 units
Materials 85,000 kg Cost $700,000
Labour 36,000 hrs Cost $330,900
Variable Overheads $400,000
Fixed Overheads $500,000
Selling Price $260 per unit

Calculate
1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub-variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

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 Example 1
A business buys goods for $700 using its bank account.
Journal Entries DR CR
$ $
Purchases 700
Bank 700
Being goods purchased by cheque

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Test 2
K Ltd makes two products. Information regarding one of those products is given below:

Budgeted output/ sales for the year: 900 units

Standard details for one unit

Note:
Variable overheads are recovered (absorbed) using hours, fixed overheads are recovered on a
unit basis.

Required:
a. Prepare a standard cost card for one unit and enter on the standard cost card the following
sub-totals:
i. Prime cost
ii. Variable production cost
iii. Total production cost
iv. Total cost

b. Calculate the selling price per unit allowing for a profit of 25% of the selling price.

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Sales variances

Calculation

Note:
Margin' = contribution per unit (marginal costing) or profit per unit (absorption costing).

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Test 7 - Sales variances
W Ltd has budgeted sales of 6,500 units but actually sold only 6,000 units. Its standard cost
card is as follows:

The actual selling price for the period was $61.

Required:
Calculate the sales price and sales volume variance for the period:
a. Using absorption costing
b. Using marginal costing

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Materials Variances

Calculation

Test 8 - Materials variances

James Marshall Co makes a single product with the following budgeted material costs per
unit:
2 kg of material A at $10/kg

Actual details:
Output 1,000 units
Material purchased and used 2,200 kg
Material cost $20,900

Calculate material price and usage variances.

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 Labour variances

Calculation

Test 9 - Labour variances

Extract from the standard cost card for K Ltd

Actual direct wages for the period were:

15,500 hours costing $69,750 in total
Actual units produced 1,000

Calculate the labour rate and labour efficiency variances.

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VARIABLE OVERHEAD VARIANCES

Calculation

Test 10 - Variable overhead variances

Extract from the standard cost card for K Ltd

Calculate the variable overhead expenditure and variable overhead efficiency variances.

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 Fixed overhead variances

Calculation

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Test 11 - Fixed overhead variances

The following information is available for J Ltd for Period 4:

Required:
If J Ltd uses an absorption costing system, calculate the following:
(a) FOAR per labour hour
(b) Fixed overhead expenditure variance
(c) Fixed overhead capacity variance
(d) Fixed overhead efficiency variance
(e) Fixed overhead volume variance

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Illustration 1
Operating statement under absorption costing
Proforma operating statement under absorption costing (AC)

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Test your understanding 12 - AC operating statement
Riki Ltd, produces and sells one product only. The standard cost and price for one unit being
as follows:

The fixed production overhead included in the standard cost isbased on an expected monthly
output of 750 units. Riki Ltd use anabsorption costing system.
During April the actual results were as follows:

Note:
Riki Ltd does not hold any inventories.

Required:
You are required to reconcile budgeted profit with actual profit for the period, calculating the
following variances:
a. Selling price,
b. Sales volume,
c. material price,
d. material usage,
e. labour rate,
f. labour efficiency,
g. fixed overhead expenditure and
h. fixed overhead volume.

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Test your understanding 2

(a)
(b)

Test your understanding 3

Test your understanding 4

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 Test your understanding 5
The total material expenditure for the organisation will bedependent partly on the prices
negotiated by the purchasing manager andpartly by the requirements and performance of the
production department.If it is included as a target for performance appraisal the manager
maybe tempted to purchase cheaper material which may have an adverseeffect elsewhere in
the organisation.
The requirement to introduce safety measures may be imposed but themanager should be able
to ensure that implementation meets budgettargets.
A notional rental cost is outside the control of the manager andshould not be included in a
target for performance appraisal purposes.

Test your understanding 6

 The production manager will be responsible for managing direct labour and direct
material usage.
 However, the manager may not be able to influence:
o the cost of the material
o the quality of the material
o the cost of labour
o the quality of labour
 Performance should be measured against the element of direct cost which the
manager can control.

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 Test your understanding 7 - Sales variances
(a)

(b) The sales price variance is the same undermarginal costing, but the sales volume variance
is calculated using thestandard contribution per unit. Here, standard contribution = $60 -
($25+$8+ $4) = $23.
Sales volume variance

Alternative calculation :

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Variance = 500 A units × standard contribution of $23 per unit = $11,500 A

Test your understanding 8 - Materials variances

Test your understanding 9 - Labour variances

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Test your understanding 10 - Variable overhead variances

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 Test your understanding 11 - Fixed overhead variances
(a) FOAR = $22,960 ÷ (6,560 units × 2 hours per unit)
$1.75 per hour
(b)

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(c)

Variance in $ = 520A hours × standard FOAR $1.75/hr = $910 A

(d)

Variance in $ = 320F hours × standard FOAR per hour $1.75 = $560 F

(e)

Variance in $ = 100 A units × standard hours of 2 × standard FOAR per hour

$1.75 = $350 A

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Note: The fixed overhead volume variance of $350A is the total of the capacity and
efficiency variances ($910 A + $560 F).

Test your understanding 12 - AC operating statement

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 Test your understanding 13 - MC operating statement
Standard contribution = $6 – $4.30 = $1.70 per cylinder

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 Test your understanding 14
(a)

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(b) Standard average time per unit for the first 4 units:
y = axb
where b = log r/ log 2
= log 0.8/ log 2
= – 0.32193
y = 100 × 4 – 0.32193
= 64 hours
Standard time for the first 4 units:
64 hours × 4 units = 256 hours
Labour rate variance:
This will be unchanged since it is based on actual hours, i.e. 270 hours.
Labour efficiency variance:

 The labour efficiency variance is now $112 A

 Taking into account the learning curve effect has changed the labour efficiency
variance from $1,040 F to $112 A
 This is because the actual learning rate was slower than expected
 In this type of scenario the firm could consider having different labour standards for
different volumes of production.

Test your understanding 15

Labour efficiency variance
The expected idle time of 5% should be included in the standard time to produce 1 unit.

Variance = 158 A hours × standard cost of $5 per hour = $790 A

Labour efficiency variance - alternative method

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This is the same formula that has been used previously but it is important to remember that
the hours are always hours paid.
Productive efficiency variance

For each productive hour worked there will be 5% non-productivetime paid. The standard
rate per hour should take this into account.
Variance = 135 A hours × (standard cost of $5 per hour × 100/95) = $711 A
Productive efficiency variance - alternative method

For each productive hour worked there will be 5% nonproductive timepaid. The standard rate
per hour should take this into account.Variance = 15 A hours × (standard cost of $5 per
hour × 100/95) = $79 A
Excess idle time variance - alternative method

Test your understanding 16 - Additional idle time example

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 Test your understanding 17 - ABC variances

Each delivery cost less than the standard cost of $250, resulting in a favourable variance.

Variance = 10 A deliveries × standard cost of $250 per delivery = $2,500 A

Each unit used more than 0.01 deliveries, resulting in an adverse variance.

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Product GX consists of a mix of three materials, J, K and L. The standard material cost of a
unit of GX is as follows:

Material J 5 kg at $4 per kg
Material K 2 kg at $12 per kg
Material L 3 kg at $8 per kg
During March, 3,000 units of GX were produced, and actual usage was:
Material J 13,200 kg
Material K 6,500 kg
Material L 9,300 kg

What was the materials yield variance for March?

To produce 19 litres of Product X, a standard input mix of 8 litres of chemical A and 12 litres
of chemical B is required. Chemical A has a standard cost of $20 per litre and chemical B has
a standard cost of $25 per litre.

During September, the actual results showed that 1,850 litres of Product X were produced,
using a total input of 900 litres of chemical A and 1,100 litres of chemical B.

The actual costs of chemicals A and B were at the standard cost of $20 and $25 per litre
respectively.

Based on the above information, which of the following statements is true?

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Mix variance:
Material AQSM AQAM Difference Standard cost Variance ($)
(litres) ($/litre)
A 800 900 100 A 20 2,000 A
B 1,200 1,100 100 F 25 2,500 F

2,000 2,000 500 F

Yield variance:
Material SQSM AQSM Difference Standard cost Variance ($)
(litres) ($/litre)
A 779 800 21 A 20 420 A
B 1,168 1,200 32 A 25 800 A

(W1) 1,947 2,000 1,220 A

(W1) 1,850 litres of output should use 1,947 litres of input (1,850/0·95)

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

Wholegrain flour 150 grams at $2·20 per kg
Yeast 10 grams at $20 per kg
Total
610 grams

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)

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Variance calculations
Mix variance
Per question, total g of materials per standard batch = 610 g.
Therefore standard quantity to produce 950 units = 950 x 610 g = 579·5 kg
Per question, actual total kg of materials used to produce 950 units = 570·5 kg
Material Actual quantity in Actual quantity in Variance Standard cost
actual mix standard mix per kg
kg kg kg $
White flour 570·5 x 420·86 408·5 12·36 1·80
450/610 =
Wholegrain 570·5 x 140·29 152 (11·71) 2·20
flour 150/610 =
Yeast 570·5 x 9·35 10 (0·65) 20
10/610 =

570·5 570·5 20·5

Yield variance
570·5 kg should yield (÷ 0·61 kg) = 935·25 loaves
570·5 kg did yield = 950 loaves
Difference 14·75 F
Valued at standard material cost = 14·75F x $1·34 = $19·77F

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

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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

Wholegrain flour 150 grams at $2·20 per kg
Yeast 10 grams at $20 per kg
Total
610 grams

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:

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

Material yield variance

Three reasons why an adverse material yield variance may arise:
 The mix may not be removed completely out of the machine, leaving some mix behind.
 Since the loaves are made by hand, they may be made slightly too large, meaning that
fewer loaves can be baked.
 Errors or changes in the mix may cause some loaves to be sub-standard and therefore
rejected by the quality inspector.
 The loaves might be baked at the wrong temperature and therefore be rejected by the
quality
To produce 19 litres of product X, a standard input mix of 8 litres of chemical A and
12 litres of chemical B is required.

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Chemical A has a standard cost of $20 per litre and chemical B has a standard cost
of $25 per litre.

During September, the actual results showed that 1,850 litres of product X were
produced, using a total input of 900 litres of chemical A and 1,100 litres of chemical
B (2,000 litres in total).

The actual costs of chemicals A and B were at the standard cost of $20 and $25 per
litre respectively.

It was expected that an actual input of 2,000 litres would yield an output of 1,900
litres (95%). The actual yield for September was only 1,850 litres, which was 50 litres
less than expected.

For the total materials mix variance and total materials yield variance, was
there a favourable or adverse result in September?
A. The total mix variance was adverse and the total yield variance was favourable
B. The total mix variance was favourable and the total yield variance was adverse
C. Both variances were adverse
D. Both variances were favourable
Hide answerFormulae & tables
B
AM (w1) SM (w2) SM
Materials AQ SP AQ SP SQ SP
A 900 18,000 800 16,000 779 15,580
B 1,100 27,500 1,200 30,000 1,168 29,200
Total T1 = 45,500 T2 = 46,000 T3 = 4

SM: A = 0·4 and B = 0·6

(w1) AQSM: A = 0·4 x 2,000 = 800 litres; B = 0·6 x 2,000 = 1,200 litres
(w2) SQSM: A = 0·4 x 1,947 = 779 litres; B = 0·6 x 1,947 = 1,168 litres
Actual production of 1,850 litres requires an input of 1,947 litres (1,850 x
0·95) in total of A and B. Therefore the SQ =
1,947 litres.
The Mix Variance is given by: T2 – T1 = $500 Favourable
The Yield Variance is given by: T3 – T2 = $1,220 Adverse

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