- 20 Marks
IMAC – APRIL 2022 – L1 – Q5 – Standard Costing and Variance Analysis
Computation of variances for a product, derivation of a cost prediction formula using the high-low method, and explanation of seasonal variation models.
Question
a) Magawa Ltd operates a standard variables costing system and manufactures a single product called “Magic Touch”.
The following quantities, costs and prices data have been extracted for the period just ended March 31, 2021 in respect of Magic Touch:
Standard cost card:
| GH¢ | |
|---|---|
| Direct materials | 15g at GH¢10/g = 150 |
| Direct labour | 8 hours at GH¢6/hour = 48 |
| Variable overheads | 8 hours at GH¢4/hour = 32 |
| Standard contribution | 25 |
| Standard selling price per unit | 255 |
Budgeted production units: 1,500
Actual results for the period ended March 31, 2021 were as follows:
| Production and sales units | 1,650 |
| Selling price per unit | GH¢278 |
| Direct materials used | 23,760g |
| Direct materials costs | GH¢308,880 |
| Direct labour hours worked | 10,725 |
| Direct labour costs | GH¢85,800 |
| Variable overheads | GH¢68,000 |
Required: i) Compute the following variances for Magawa Ltd for the period ended March 31, 2021:
- Direct materials price variance. (1 mark)
- Direct materials usage variance. (1 mark)
- Direct labour rate variance. (1 mark)
- State ONE (1) possible reason for the material price variance calculated. (1 mark)
- State ONE (1) possible reason for the labour rate variance calculated. (1 mark)
b) The Valuation Department of a large firm of surveyors wishes to develop a method of predicting its total costs in a period. The following past costs and activity levels have been recorded.
| Period | Number of Valuations (V) | Total Cost (TC) GH¢ |
|---|---|---|
| 1 | 420 | 82,200 |
| 2 | 515 | 90,275 |
| 3 | 425 | 82,900 |
| 4 | 500 | 90,000 |
Required: i) Derive a formula for the total cost model for a period. (4 marks) ii) Evaluate the usefulness of the high-low method. (4 marks)
c) The trend line on its own is not sufficient to make forecasts for the future. Estimates of the size of the ‘seasonal’ variation for each of the different seasons are needed. The seasonal variation is then used to adjust a forecast trend.
Required: Explain TWO (2) models used to estimate seasonal variations. (7 marks)
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