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IM17.1 Intermediate: Flexible budgets and computation of labour and material variances.

(a) (i) Prepare a columnar statement showing, by element of cost, the:


(i) original budget
(ii) flexed budget
(iii) actual
(iv) total variances

Variances
Original Flexed Actual
Units 20,000 18,500 18,500
Direct material 480,000 444,000 442,650
Direct labor 140,000 129,500 129,940
Variable production overhead 60,000 55,500 58,800
Fixed production overhead 100,000 100,000 104,000
Total 780,000 729,000 735,390

(ii) subdivide the variances for direct material and direct labour shown in your answer to (a) (i)–(iv) above

Direct Material Variance


(i) Material Price Variance = (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)
Material Price Variance = -£ 11,350 Favorable

Actual Price 3.90

(ii) Material Quantity Variance = (Standard Price x Actual Quantity) - (Standard Price x Standard Quan
Material Quantity Variance =£ 10,000 Unfavorable

Standard Quantity 111,000

(iii) Total Material Variance -£ 1,350 Favorable

(b) Explain the meaning and use of a rolling forecast.

Rolling forecasts—as replacement for budgesting as advocated by beyond budgeting—are main alte
budget, it is advocated because it does not have the same compulsory and stifling image. Key per
ben
iances
Total Variances

1,350 Flexed
(440) Actual
(3,300) Actual
(4,000) Actual
(6,390) Actual

r to (a) (i)–(iv) above to be more informative for managerial purposes.

Direct Labor Variance


x Actual Quantity) (i) Labor rate variance = (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)
Labor rate variance = £ 5,340 Unfavorable

Actual Price 7.30

rice x Standard Quantity (ii) Labor Efficiency Variance = (Standard Price x Actual Quantity) - (Standard Price x Standa
Labor Efficiency Variance = -£ 4,900 Favorable

(iii) Total Labor Variance £ 440 Unfavorable

geting—are main alternatives to the annual budget. It can be produced on a monthly or quarterly basis. Compared wi
fling image. Key performance indicators ar embraced in rolling forecasts. Also, it is incorporate exception based mon
benchmarking.
ndard Price x Actual Quantity)

ty) - (Standard Price x Standard Quantity)

quarterly basis. Compared with the annual


rporate exception based monitoring and
IM17.4 Intermediate: Computation of fixed overhead variances

(a) (i) Calculate the fixed production overhead cost variance and the following subsidiary variances: exp

Fixed overhead variance = Standard cost for actual production – Actual cost
Fixed overhead variance = 20405 - 25536
Fixed overhead variance = £5,131 Adverse

Subsidiary Variances:
Expenditure = Budgeted cost - Actual Cost
Expenditure = 22260 - 25536
Expenditure = £ 3,276 Adverse

Efficiency = Standard rate * (Standard hours – Actual hours)


Efficiency = 2.65 * ( 7700
Efficiency = £ 742 Adverse

Capacity = Standard rate * (Actual hours – Budgeted hours)


Capacity = 2.65 * ( 7980
Capacity = £ 1,113 Adverse

(ii) Provide a summary statement of these four variances

Fixed Overhead Variance:


Expenditure = £ 3,276 Adverse
Efficiency = 742 Adverse
Capacity = 1113 Adverse
£ 5,131 Adverse

(b) Briefly discuss the possible reasons why adverse fixed production overhead expenditure, efficiency

Adverse variances may be caused by business expansion not taken into consideration in the budg
increase in fixed overheads), inefficient fixed overheads management (like cases due to empire bu
and planning errors (like increase in insurance premium being higher than budget due to chan

Furthermore, the possible reasons of adverse fixed overhead expenditure are increase in cost
services and change in type of services used. Labor force working less efficiently and lost product
overhead efficiency. Also, adverse fixed overhead capacity are caused by machine break

(c) Briefly discuss two examples of interrelationships between the fixed production overhead efficiency
Not all favorable means good. When you risk to hire unskilled workers as replacement of skilled w
and adverse labor efficiency, material usage, and overhead efficiency variances will occur. The s
purchase cheap and low quality materials. It will also result in favorable material price variance
efficiency and overhead efficiency variances at the same time. Additional costs are to be incurre
materials to suffice company standards are the reasons behind the sa
head variances

ost variance and the following subsidiary variances: expenditure, efficiency and capacity

t for actual production – Actual cost Standard rate = Fixed Overhead / Direct Labor Hou
Standard rate = £ 2.65

Standard hours per unit = Number of labour hours/ Budgeted


Standard hours per unit = 7
st - Actual Cost
Standard hours = Actual production units * Standard
Standard hours = 7700

e * (Standard hours – Actual hours)


-7980 )

e * (Actual hours – Budgeted hours)


- 8400 )

r variances

dverse fixed production overhead expenditure, efficiency and capacity variances occur.

ness expansion not taken into consideration in the budget setting process (causing a stepped
ed overheads management (like cases due to empire building pursuits of senior management)
surance premium being higher than budget due to changes in the risk profile of business).

dverse fixed overhead expenditure are increase in cost of services used, excessive use of
ed. Labor force working less efficiently and lost production through strike cause adverse fixed
e fixed overhead capacity are caused by machine breakdown, strikes, labor shortage.

nships between the fixed production overhead efficiency variances and the material and labour variances.
risk to hire unskilled workers as replacement of skilled workers, favorable wage rate variance
age, and overhead efficiency variances will occur. The same thing happens when you risk to
als. It will also result in favorable material price variance and adverse material usage, labor
nces at the same time. Additional costs are to be incurred due to rework or maybe additional
uffice company standards are the reasons behind the said facts.
ed Overhead / Direct Labor Hours

mber of labour hours/ Budgeted production units

ual production units * Standard hours per unit

nd labour variances.
IM17.5 Intermediate: Labour and overhead variances and ex-post wage rate analysis. (TASK1A ONL

(a) Calculate the following variances:

(i) Labour Rate Variance = (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)
Labour Rate Variance = -£ 572 Favorable

(ii) Labor Efficiency Variance = (Standard Price x Actual Quantity) - (Standard Price x Standard Quanti
Labor Efficiency Variance = £ 12,480 Unfavorable

Standard Quantity 10,400

(iii) Fixed Overhead Expenditure Variance = (Actual Fixed Overhead - Budgeted Fixed Overhead)
Fixed Overhead Expenditure Variance = £ 18,000 Unfavorable
rate analysis. (TASK1A ONLY)

Price x Actual Quantity) (iv) Fixed Overhead Volume Variance = (Budgeted Fixed Overhead - Ap
Fixed Overhead Volume Variance =

Applied Fixed Overhead = (Standard Price x Standard Quantity of ov


ndard Price x Standard Quantity) Applied Fixed Overhead

Standard Price of Fixed Overhead per Unit

(v) Fixed Overhead Capacity Variance = (Budgeted Hours x Standard P


Budgeted Fixed Overhead) Fixed Overhead Capacity Variance =

(vi) Fixed Overhead Efficiency Variance =(Actual Hours x Fixed Overhea


Fixed Overhead Efficiency Variance =
(Budgeted Fixed Overhead - Applied Fixed Overhead)
£ 25,200 Unfavorable

d Price x Standard Quantity of overhead)


163,800

15.75

(Budgeted Hours x Standard Price of Overhead) - (Actual Hours x Standard Price of Overhead)
£ 8,820 Unfavorable

=(Actual Hours x Fixed Overhead Hourly Rate) - (Standard Hours x Fixed Overhead Hourly Rate)
£ 16,380 Unfavorable
IM17.7 Intermediate: Calculation of inputs working backwards from variances

(a) Prepare for the month of April a statement of total standard costs for product EM

Actual Cost (£)


Direct material E 6270
Direct material M 650
Direct Labor 23200
Variable Overhead 6720
Fixed Overhead 27000

Prepare a standard product cost sheet for one unit of product


(b) EM

Direct material E 1 meter at £ 10


Direct material M 0.33 meter at £ 3
Direct Labor 5 hours at £ 7
Variable Overhead 5 hours at £ 2
Fixed Overhead 5 hours at £ 10

( c) Calculate the number of units of product EM which were budgeted for April

Budgeted Fixed Overheads = Actual Fixed Overheads + expenditure variance


Budgeted Fixed Overheads = £ 27,500

Budgeted Production = Budgeted Fixed Overheads / Standard Cost


Budgeted Production = 550 units

State how the material and labour cost standards for product
(d) EM would originally have been determined

Given that there are two approaches that can be used to set standards—past historical record
operations through careful specifications of materials, labour and

In historical records, there is a risk of past inefficiencies inclusion as standards are set based o
attention on finding the best combination of resources, production methods an

In engineering studies approach, the standard cost for e


and overheads) is derived from multiplying the quantity of input that should be used

Therefore, it is how the material and labour cost standards fo


om variances

for product EM

Total Variance (£) Standard Cost (£)


270 A 6000
50 A 600
2200 A 21000
720 A 6000
3000 F 30000

£ 10
1
35
10
50
£ 106

enditure variance

Standard Cost

set standards—past historical records (estimate labor and material usage) and engineering studies (detailed study of
ecifications of materials, labour and equipment and on controlled observations of operations).

lusion as standards are set based on average past performance for the same or similar operations. Thus, it does not
f resources, production methods and product quality as its disavantage compared to engineering method.

es approach, the standard cost for each operation (for direct labour, direct materials
quantity of input that should be used per unit of output by the amount that should be paid for each unit of input.

material and labour cost standards for product EM would originally have been determined.
eering studies (detailed study of each
erations).

milar operations. Thus, it does not focus


o engineering method.

paid for each unit of input.

ined.

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