Accounting for Management, 1/e

Subramania Ramanathan

CH 22: Standard Costing:

1. A company manufactures and sells two products. The budget and actual data for a quarter is as
follows:
Budget:
Product

Sales

Price/unit (Rs)

Cost/unit (Rs)

Market size (units)

8,000

40

30

64,000

16,000

25

16

96,000

Actual:
Product

Sales

Cost/unit (Rs)

Market size (units)

9,500

32

80,000

17,500

14

108,000

The actual price remained the same as budgeted price.

Required:
(i)

Analyse the variances in to market share variance, market size variance, sales quantity
variance and cost variance.
Explain the reasons for variation in profit.

(ii)

Answer:
(i)
Product
A
B

BQ

RBQ

8000
16,000
24,000

10,000
18,000
28,000

AQ in BR
9,000
18,000
27,000

AQ
9,500
17,500
27,000

SGM

BQ x SGM

10
9

80,000
144,000
224,000

RBQ x SGM AQBR x SGM AQ x SGM AGM

100,000
162,000
262,000

90,000
162,000
252,000

95,000
157,500
252,500

Market Size variance:

224,000 262,000 = Rs.

38,000 F.

Market share variance:

262,000 252,000 = Rs.

10,000 A.

Sales Quantity variance:

224,000 252,000 = Rs.

28,000 F

Sales Mix Variance:

252,000 252,500 = Rs.

500 F

Sales Volume variance:

224,000 252,500 = Rs.

28,500 F

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8
11

AQ x AGM
76,000
192,500
268,500

Accounting for Management, 1/e

Subramania Ramanathan

Cost variance;
(ii)

252,000 268,500 = Rs.

16,500 F

The company has not been able to capture the budgeted level of market share in respect of
both the products. Otherwise the mix variance and cost variance are favourable.

2. A single product company has set the budgeted production per month at 2,400 units. The standard
material requirement is 2 kg per unit at a standard price of Rs. 50 per kg.
In June 2013, the company produced 2,200 units. The actual consumption per unit of material is
1.9 kg even though the buyers have set a higher quality standards which demands 5% increase in the
raw material consumption. The economy that is prevalent all over the world has raised the prices of the
raw materials y 20% but the departmental manager has been able to buy them at Rs. 61 per kg.
You are required to analyse the variances into (a) operating variances, (b) planning variances
and (c) total variances. The variances under each category are required to be further analysed in to
price variance and usage variance.

Answer:
Actual output

2,200 units

Standard quantity:

2,200 x 2 = 4,400 kg

Increase in standard

5%

Revised standard quantity:

2,200 x 2 x 1.05 = 4,620 kg

Revised standard Price:

Rs. 50 x 1.20 = Rs. 60 per kg

Actual Quantity consumed:

2,200 x 1.9 = 4,180 kg

Planning Variances:

SQ
4,400

RSQ
4,620

SP
50

SQ X SP
220,000

RSQ X SP
231,000

RSP
60

RSQ X RSP
277,200

Planning Usage Variance:

Rs.

220,000 231,000 = Rs. 11,000 A

Planning Price variance:

Rs.

231,000 277,200 = Rs. 46,200 A

Operating Variances:

RSQ
4,620

AQ
4,180

Operating Usage Variance:

RSP
60
Rs.

RSQ x RSP
277,200

AQ x RSP
250,800

AP
61

277,200 250,800 = Rs. 26,400 F

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AQ x AP
254,980

Accounting for Management, 1/e

Operating Price Variance:

Subramania Ramanathan

Rs.

250,800 254,980 = Rs. 4,180 A

Total Variances:

SQ
4400

AQ
4180

SP
50

SQ x SP
220,000

AQ x SP
209,000

AP
61

AQ x AP
254,980

Total Usage Variance:

Rs.

220,000 209,000 = Rs. 11,000 F

Total Price Variance:

Rs.

209,000 254,980 = Rs. 45,980 A

3.
A company using standard costing has prepared the following cost sheet for its product based
on a budgeted output of 1,200 units per month:
Rs
Direct Materials

6 kg @ Rs. 20 per kg

120

Direct Labour

8 hours @ Rs. 25 per hour

200

Variable overheds

8 hours @ Rs. 20 per hour

160

Fixed overheads

8 hours @ Rs. 30 per hour

240

Selling Price

800

In June 2012, the company produced 1,100 units of the product and furnished the following
details of costs incurred and selling price realized:
Direct Materials

7,000 kg @ Rs. 19 per kg

Direct Labour

9,500 hours @ Rs. 24 per hour

Variable overheads

Rs. 175,000

Fixed overheads

Rs. 300,000

Selling price

Rs. 820

The company has sold all the units and carried no opening or closing WIP or finished goods
inventories.
Calculate all variances and prepare a statement of reconciliation of income.

Answer:

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Accounting for Management, 1/e

Subramania Ramanathan

Standard requirement:
Direct Materials:

1,100 units X 6 kg = 6,600 kg

Direct Labour:

1,100 units x 8 hours = 8,800 hours

Standard gross margin:

800 720 = Rs. 80

Actual gross margin:

820 720 = Rs. 100

Direct Materials:
SQ
AQ
6,600
7,000

SP
20

SQ x SP
132,000

AQ x SP
140,000

AP
19

AQ x AP
133,000

Usage Variance:

132,000 140,000 =

Rs. 8,000 A

Price Variance:

140,000 133,000

Rs. 7,000 F

Material Cost Variance:

132,000 133,000 =

Rs. 1,000 A

Direct Labour:
SH
AH
8,800
9,500

SR
25

SH x SR
220,000

AH x SR
237,500

AR
24

AH x AR
228,000

Efficiency Variance:

220,000 237,500 =

17,500 A

Labour Rate Variance:

237,500 228,000 =

9,500 F

Labour Cost Variance:

220,000 228,000 =

8,000 A

Variable overheads:
A: Charged to production:

8,800 hours x 20

B: Standard cost of actual hours :

9,500 hours x Rs. 20

Rs.

176,000
190,000

C: Actual overheads

175,000

Efficiency Variance:

176,000 190,000 =

Rs. 14,000 A

Expense Variance:

190,000 175,000 =

Rs. 15,000 F

Total Variance:

176,000 175,000 =

Rs. 1,000 F

Fixed overheads:
A: Charged to production:

8,800 hours x Rs. 30

B: Standard cost of actual hours:

9,500 hours x Rs. 30

Rs

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264,000
285,000

Accounting for Management, 1/e

Subramania Ramanathan

C: Budget:

9,600 hours x Rs. 30

288,000

Actual expense:

300,000

Efficiency Variance:

264,000 285,000 =

Rs. 21,000 A

Capacity Variance:

285,000 288,000 =

Rs. 3,000 A

Volume Variance:

264,000 288,000 =

Rs. 24,000 A

Expense Variance;

288,000 300,000 =

Rs. 12,000 A

Total variance:

264,000 300,000 =

Rs. 36,000 A

Sales gross margin variance:

BQ
AQ
SGM
1,200
1,100
80

BQ x SGM AQ x SGM
96,000
88,000

AGM
100

AQ x AGM
110,000

Sales Volume variance:

96,000 88,000 =

Rs. 8,000 A

Sales Price Variance:

88,000 110,000 =

Rs. 22,000 F

Total sales gross margin Variance:

96,000 110,000 =

Rs. 14,000 F

Reconciliation:
Particulars

Variances
F
A

Budgeted gross margin

Gross margin volume variance
Standard gross margin
Sales Price variance
Actual gross margin
Cost Variances:
Material usage varince
Material price variance
Labour efficiency variance
Labour rate variance
Variable overheads efficiency variance
Variable oveheads expense variance
Fixed oveheads efficiency variance
Fixed ovverheads capacity variance
Fixed overheads expense variance
Total variances
Actual profit

Rs
96,000
-8,000
88,000
22,000
110,000

8,000
7,000
17,500
9,500
14,000
15,000

31,500

21,000
3,000
12,000
75,500

Actual Profit:

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-44,000
66,000

Accounting for Management, 1/e

Subramania Ramanathan

Sales: 1,100 units @ Rs. 820

902,000

Direct materials:

7,000 kg X Rs. 19

133,000

Direct labour:

95,000 hours @ Rs. 24 228,000

Variable overheads

175,000

Fixed overheads

300,000

836,000

Actual Profit

66,000

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