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STANDARD COSTING 25 MARKS
ABC (Pty) Ltd is a manufacturer of beds. It uses a standard absorption costing system to monitor
performance of managers and departments. A standard absorption cost card for one of its models,
the Dreamer, is given below.

$ $
Selling price 250·00
Production costs
Direct material: 12 metres at $1·50 per metre 18·00
Direct labour: 4 hours at $6·00 per hour 24·00
Variable overhead: 4 hours at $15·00 per hour 60·00
Fixed overhead: 4 hours at $10·00 per hour 40·00

142·00
–––––––
Gross profit $108·00
––––––––

Budgeted production and sales are 1,000 Dreamers per month.

Actual results for the manufacture and sale of Dreamers for the most recent month were as follows:
Sales: 1,200 beds at $240 each.
Production: 1,300 beds
Direct material (purchased and used): 16,000 meters at $1·40 per meter
Direct labour (worked and paid): 5,000 hours at $6·00 per hour
Variable overhead $75, 500
Fixed overheads $54, 600.

There were no opening stocks of finished goods.
Required:
(a) Calculate the following variances for the most recent month
(i) Direct material price; (2 marks)
(ii) Direct material usage; (2 marks)
(iii) Direct labour rate; (2 marks)
(iv) Direct labour efficiency; (2 marks)
(v) Variable overhead expenditure; (2 marks)
(vi) Variable overhead efficiency; (2 marks)
(vii) Fixed overhead expenditure; (3 marks)
(viii)Fixed overhead capacity; (2 marks)

(ix) Fixed overhead efficiency; (2 marks)

Answer 1

To calculate the variances for the most recent month, we compare actual results with standard costs. The direct material price variance is -$1,600, and the direct material usage variance is $6,000. The direct labour rate variance is $0, and the direct labour efficiency variance is $6,000. The variable overhead expenditure variance is -$7,500, and the variable overhead efficiency variance is $15,000. The fixed overhead expenditure variance is $19,600, the fixed overhead capacity variance is $10,000, and the fixed overhead efficiency variance is $10,000.

To calculate the variances for the most recent month, we need to compare the actual results with the standard costs. Here are the calculations:

(i) Direct material price variance = (actual price - standard price) * actual quantity = ($1.40 - $1.50) * 16,000 = -$1,600

(ii) Direct material usage variance = (actual quantity - standard quantity) * standard price = (16,000 - 12,000) * $1.50 = $6,000

(iii) Direct labour rate variance = (actual rate - standard rate) * actual hours = ($6.00 - $6.00) * 5,000 = $0

(iv) Direct labour efficiency variance = (actual hours - standard hours) * standard rate = (5,000 - 4,000) * $6.00 = $6,000

(v) Variable overhead expenditure variance = (actual expenditure - standard expenditure) = $75,500 - (4 * 5,000 * $15.00) = -$7,500

(vi) Variable overhead efficiency variance = (actual hours - standard hours) * standard rate = (5,000 - 4,000) * $15.00 = $15,000

(vii) Fixed overhead expenditure variance = (actual expenditure - standard expenditure) = $54,600 - (4 * 4,000 * $10.00) = $19,600

(viii)Fixed overhead capacity variance = (actual hours - standard hours) * standard rate = (5,000 - 4,000) * $10.00 = $10,000

(ix) Fixed overhead efficiency variance = (actual hours - standard hours) * standard rate = (5,000 - 4,000) * $10.00 = $10,000