PREPARED BY: HOMAM ATIF ABBAS ELHASSAN

VARIANCES

A company produces and sells one product only, the Thing, the standard cost for one unit being as
follows.

Particular Cost ($)

Direct material A – 10 kilograms at $20 per kg 200
Direct material B – 5 litres at $6 per litre 30
Direct wages – 5 hours at $6 per hour 30
Fixed production overhead 50
Total standard cost 310

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units. Fixed production overhead is absorbed on the basis of direct labour hours

During April the actual results were as follows:

Production 800 units

Material A 7,800 kg used, costing $159,900
Material B 4,300 litres used, costing $23,650
Direct wages 4,200 hours worked for $24,150
Fixed production overhead $47,000

Required:

(a) Calculate price and usage variances for each material.

(b) Calculate labour rate and efficiency variances.

(c) Calculate fixed production overhead expenditure and volume variances and then subdivide the
volume variance.

Answer

(A)

MATERIAL PRICE VARIANCE :

(AP-SP)AQ

AP= AC/AQ = 159900/7800=20.5

(20.5-20)7800=3900A

MATERIAL USAGE VARIANCE:

(AQ-SQ)SP

SQ=quantity To Produce 1 Unit * Actual Production

10kg*800=8000

(7800-8000)20= 4000F

1
PREPARED BY: HOMAM ATIF ABBAS ELHASSAN

(B)

MATERIAL PRICE VARIANCE :

(AP-SP)AQ

AP= AC/AQ = 23650/4300 = 5.5

(5.5-6)4300= 2150F

ATERIAL USAGE VARIANCE:

(AQ-SQ)SP

SQ=quantity To Produce 1 Unit * Actual Production

5*800=4000

(4300-4000)6=1800A

LABOUR VARIANCE::

a) LABOUR RATE VARIANCE:

(AR-SR) AH

AR= 24150/4200=5.75

SR=5*800=4000

(5.75-6)*4200=1050 F

b) LABOUR EFFICIENCY VARIANCE :

(AH-SH)SR

SH=5*800=4000

(4000-4200)6=1200 A

FIXED OVERHEAD VARIANCE::

a) FIXED OVERHEAD EXPENDITURE VARIANCE:

BUDGET PRODUCTION OH COST-ACTUAL PRODUCTION OH COST

BUDGET PRODUCTION OH COST=50*900=45000

(45000-47000) =2000A

b) FIXED OVERHEAD VOLUME VARIANCE:

(BUDGET PRODUCTION – ACTUAL PRODUCTION) STANDARD OAR/UNIT

(900-800)50=5000 A

2
PREPARED BY: HOMAM ATIF ABBAS ELHASSAN

FIXED OVERHEAD VOLUME VARIANCE:

a) FIXED OVERHEAD CAPACITY VOLUME VARIANCE :

(AH-BH)ST.OAR/HOUR

(4300-4500)10 =2000A

ST.OAR/HOUR50/5=10

b) FIXED OVERHEAD EFFICIENCY VOLUME VARIANCE :

(AH-SH)ST.OAR/HOUR

(4300-4000)10=3000A

FIXED OVERHEAD VOLUME VARIANCE

FIXED OVERHEAD CAPACITY VOLUME VARIANCE + FIXED OVERHEAD EFFICIENCY VOLUME

VARIANCE

3000A+2000A=5000A