Question

Praveena Limited makes a single product, T, using a single raw material R. Standard cost relating to T have been calculated as follows. Standard cost schedule Per Unit (Rs) Direct material, R, 10kg at Rs. 20 per kg 200 Direct labour, 5 hours at Rs.6 per hour 30 Variable production overhead, 5 hours at Rs.1 per hour 5 Fixed production overhead, 5 hours at Rs.10 per hour 50 Standard cost 285 Standard profit 95 Standard selling price 380 The company expects to produce 900 units in month of April 2021. During April 2021 the actual results are as follows. 800 units of product T were produced and sold at Rs. 312,000. 7800 kgs costing Rs. 159,900 were bought and used. 4200 hours were worked during the month and total wages were Rs. 24,150. The variable production overhead for the month was Rs. 4,900. The fixed production overhead for the month was Rs. 47,000. 1. Calculate the following variances for the month of April 2021. a. Direct material cost variance and direct material usage variance b. Direct labor rate variance and direct labor efficiency variance c. Variable overhead expenditure variance and variable overhead efficiency variance d. Fixed overhead expenditure variance, fixed overhead efficiency variance and fixed overhead capacity variance e. Sales price variance and sales volume variance 8 1. Prepare a summary of total cost variances and total sales variances. 2. Identify possible causes for the variances and recommend corrective actions for adverse variances.

Answer 1

To calculate the variances, we need to compare the actual results with the standard costs. Let's calculate each variance:

a. Direct material cost variance:
Actual cost of material = Rs. 159,900
Standard cost of material = 800 units × (10 kg × Rs. 20/kg) = Rs. 160,000
Direct material cost variance = Actual cost - Standard cost
Direct material cost variance = Rs. 159,900 - Rs. 160,000 = Rs. -100 (Adverse)

Direct material usage variance:
Actual quantity used = 7800 kg
Standard quantity allowed = 800 units × 10 kg = 8000 kg
Standard price per kg = Rs. 20/kg
Direct material usage variance = (Actual quantity used - Standard quantity allowed) × Standard price per kg
Direct material usage variance = (7800 kg - 8000 kg) × Rs. 20/kg = Rs. -40,000 (Adverse)

b. Direct labor rate variance:
Actual rate per hour = Rs. 24,150 / 4200 hours = Rs. 5.75/hr
Standard rate per hour = Rs. 6/hr
Direct labor rate variance = (Actual rate per hour - Standard rate per hour) × Actual hours worked
Direct labor rate variance = (Rs. 5.75/hr - Rs. 6/hr) × 4200 hours = Rs. -525 (Adverse)

Direct labor efficiency variance:
Actual hours worked = 4200 hours
Standard hours allowed = 800 units × 5 hours = 4000 hours
Standard rate per hour = Rs. 6/hr
Direct labor efficiency variance = (Actual hours worked - Standard hours allowed) × Standard rate per hour
Direct labor efficiency variance = (4200 hours - 4000 hours) × Rs. 6/hr = Rs. 1200 (Favorable)

c. Variable overhead expenditure variance:
Actual variable overhead = Rs. 4,900
Standard variable overhead = 800 units × (5 hours × Rs. 1/hr) = Rs. 4000
Variable overhead expenditure variance = Actual variable overhead - Standard variable overhead
Variable overhead expenditure variance = Rs. 4,900 - Rs. 4000 = Rs. 900 (Adverse)

Variable overhead efficiency variance:
Actual hours worked = 4200 hours
Standard hours allowed = 800 units × 5 hours = 4000 hours
Standard variable overhead rate per hour = Rs. 1/hr
Variable overhead efficiency variance = (Actual hours worked - Standard hours allowed) × Standard variable overhead rate per hour
Variable overhead efficiency variance = (4200 hours - 4000 hours) × Rs. 1/hr = Rs. 200 (Favorable)

d. Fixed overhead expenditure variance:
Actual fixed overhead = Rs. 47,000
Standard fixed overhead = 800 units × (5 hours × Rs. 10/hr) = Rs. 40,000
Fixed overhead expenditure variance = Actual fixed overhead - Standard fixed overhead
Fixed overhead expenditure variance = Rs. 47,000 - Rs. 40,000 = Rs. 7,000 (Adverse)

Fixed overhead efficiency variance:
Actual hours worked = 4200 hours
Standard hours allowed = 800 units × 5 hours = 4000 hours
Standard fixed overhead rate per hour = Rs. 10/hr
Fixed overhead efficiency variance = (Actual hours worked - Standard hours allowed) × Standard fixed overhead rate per hour
Fixed overhead efficiency variance = (4200 hours - 4000 hours) × Rs. 10/hr = Rs. 2000 (Favorable)

Fixed overhead capacity variance:
Standard hours allowed =