Topic: Standard Costing and Variance Analysis

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MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Question

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

Answer

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Tags: Cost Control, Performance Evaluation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: Nov 2024

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

Question

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

	Budget	Actual
Output (production and sales)	10,000	9,000
GH¢	GH¢
Sales Revenue	175,000	162,000
Raw Materials	(80,000) (100,000 meters)	(64,380) (74,000 meters)
Labour	(35,000) (5,000 hours)	(30,960) (4,300 hours)
Fixed Overheads	(35,000)	(36,225)
Operating Profit	25,000	30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

Sales (price, volume)
Material (price and usage)
Labour (rate and efficiency)

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q3d – Fixed Overhead Volume Variance

Explains the concept of fixed overhead volume variance and lists potential causes for such variances.

Question

Fixed Overhead Volume Variance
Fixed overhead volume variance (FOVV) measures the difference between the actual fixed overheads incurred and the fixed overheads that should have been incurred at the actual level of activity.

Required:
Explain fixed overhead volume variance and TWO possible causes of such variances.

Answer

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Tags: Cost Control, Fixed Overhead, Volume Variance
Level: Level 1

Topic: Standard Costing and Variance Analysis
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q3c – Material and Labour Variances

Calculates material and labour variances based on given actual and standard cost data.

Question

Material and Labour Variances
The data below relates to Agbamame Enterprise for its flagship product, “Herb of Life”:

Standard Cost Card – Per Unit of Herb of Life

Description	Cost (GH¢)
Direct materials	5 kg at GH¢4 per kg = GH¢20
Direct labour	4 hours at GH¢15 per DLH = GH¢60
Variable overhead	4 hours at GH¢20 per DLH = GH¢80
Fixed overhead	GH¢50 per unit

Budgeted production: 600 units
Actual sales and production: 550 units

Actual cost of:

Actual Costs	Cost (GH¢)
Labour (1650 hours)	16,500
Materials (1650 kg)	5,775
Fixed overhead	15,000
Variable overhead	13,275

Data shows that 5% of labour hours paid for was idle, and 10% of materials bought was in stock at the end of the period.

Required:
i) Calculate the material variances.
ii) Calculate the labour variances.

Answer

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Tags: Labour Variance, Material Variance, Standard Costing, Variance Analysis
Level: Level 1

Topic: Standard Costing and Variance Analysis
Series: Nov 2024

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

Question

GOODLAND Limited produces and sells a single product. The company adopts a standard absorption costing system and absorbs overheads on the basis of direct labour hours. Presented below are the standard cost details and selling price for a single unit of the product:

It has been estimated that the production and sales for the month would be 2,000 units. However, the estimated production for the month has been used as a basis for determining the fixed overhead absorption rate.

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

Answer

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Tags: Absorption Costing, Overhead Variance, Profit reconciliation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – Nov 2014 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate various cost and sales variances, including an operating statement for Ibek Limited.

Question

Ibek Limited manufactures a standard product and operates a system of variance accounting using a fixed budget.

As a newly appointed Management Accountant, you are responsible for preparing the monthly operating statements.

Extracts from the budget for the standard product cost and actual data for the month ended 31 December 2013 are given below:

Budgeted and Standard Cost Data:

Budgeted sales and production for the month: 20,000 units
Standard cost for each unit of product:

Item	Details
Direct materials:	A: 10 kg at N2 per kg
	B: 5 kg at N10 per kg
Direct wages	5 hours at N6 per hour
Fixed overhead	Absorbed at 200% of direct wages

Budgeted sales price has been calculated to give a margin of 20% of sales price.

Actual Data for the Month Ended 31 December 2013:

Production: 19,000 units sold at a price of 15% higher than that budgeted
Direct materials consumed:

Item	Quantity	Cost per kg
Material A	192,000 kg	N2.40
Material B	96,000 kg	N9.40

Direct wages incurred: 92,000 hours at N6.40 per hour
Fixed production overhead incurred: N580,000

Required:

(a) Prepare the operating statement for the month ended 31 December 2013. (3 Marks)

(b) Calculate the following variances: i. Direct material cost variance (5 Marks)
ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – May 2017 – L2 – SA – Q6 – Standard Costing and Variance Analysis

Advise on optimal replacement timing for AL Limited's machine based on cost-benefit analysis.

Question

AL Limited, a manufacturing company based in Aba, produces a popular mortar coloring agent called Hadtone. Hadtone is packaged in five-litre cartons, sold at ₦300 each. Estimated maximum annual demand is 300,000 cartons, justifying one processing machine, replaced every three years though it has a four-year productive life.

Machine Details: Initial productive capacity aligns with maximum demand, decreasing by 15,000 units per annum. Maintenance costs in year one are ₦300,000, rising by ₦50,000 each subsequent year. Variable costs per carton (excluding maintenance) are ₦200.
Machine Depreciation: Straight-line method. Sale proceeds after one year are ₦8,000,000, reducing by ₦3,000,000 each following year.
Machine Cost Increase: Recent machine cost rise to ₦12,000,000 prompts reconsideration of replacement policy to optimize cash flow. Assume all costs/revenues except initial payment occur year-end; initial cost paid at purchase.

Requirements:

a. Calculate replacement frequency based on maximum capacity usage, including supporting calculations. Assume a 10% cost of capital. (12 Marks)

b. Itemize key assumptions made in the calculations. (3 Marks)

Answer

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Tags: Cash Flow, Cost of Capital, Depreciation, Replacement Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – May 2017 – L2 – SA – Q4 – Standard Costing and Variance Analysis

Calculate budgeted profit and perform variance analysis for Dabens Nigeria's job costing system.

Question

Dabens Nigeria Limited’s job costing system includes two direct cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products based on standard direct manufacturing labor hours (SDMLH). At the beginning of 2016, Dabens adopted the following standards for manufacturing costs and sales:

S/N	Cost Details	Input	Cost per Output Unit (N)
1	Direct Materials	3 kg at N500	1,500
2	Direct Manufacturing Labor	5 hours at N200	1,000
3	Manufacturing Overhead: Variable	N120 per SDMLH	600
	Manufacturing Overhead: Fixed	N160 per SDMLH	800
4	Unit Manufacturing Cost		3,900
5	Standard Profit Margin		1,300
6	Standard Selling Price		5,200

The denominator level for total manufacturing overhead per month in 2016 is 40,000 direct manufacturing labor hours. Dabens’ flexible budget for January 2016 was based on this denominator level. January records show the following data:

Direct materials purchased: 25,000 kg at N520 per kg
Direct materials used: 23,100 kg
Direct manufacturing labor: 40,100 hours at N190 per hour
Total actual manufacturing overhead (fixed and variable): N12,000,000
Actual production/sales: 7,800 output units
Actual selling price: N5,350

The proportion of actual variable and fixed overhead costs is consistent with the standard.

Required:

a. Calculate the budgeted profit of the company for January 2016.
(2 Marks)

b. Calculate the following variances for January 2016:

i. Direct material variances
ii. Direct manufacturing labor variances
iii. Variable manufacturing overhead variances
iv. Fixed manufacturing overhead variances
v. Sales variances
(10 Marks)

c. Prepare a statement reconciling the actual profit with the budgeted profit.
(8 Marks)

Answer

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Tags: Budgeted profit, Cost Variance, Standard Costing, Variance Calculation
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2017

PM – Nov 2015 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material, labour, and variable overhead variances, and discuss causes for variances in KOMERE Limited’s cost system.

Question

KOMERE Limited operates a Standard Costing System. Below are the standard and actual costs for October 2015:

Standard Cost Information:

Direct Material:

A: 20 kg at N100 per kg = N2,000
B: 30 kg at N80 per kg = N2,400

Direct Labour:

Skilled: 10 hours at N40 per hour = N400
Unskilled: 10 hours at N25 per hour = N400

Variable Overhead Cost:

10 hours at N20 per hour = N200

Total Standard Cost per unit = N5,250

Actual Results:

Direct Material:
- Material A: 105,000 kg purchased at N10,290,000; 99,000 kg consumed
- Material B: 148,000 kg purchased at N11,988,000; 144,000 kg consumed
Direct Labour:
- Skilled Labour: 56,000 hours at N2,352,000
- Unskilled Labour: 56,000 hours at N1,344,000
Variable Overhead: N1,064,000
Actual Production: 4,800 units

Required:

(a) Calculate all the relevant variances. (8 Marks)

(b) What are possible causes of the variances computed? (7 Marks)

Answer

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Tags: Direct Labour Variances, Direct Material Variances, Standard Costing, Variable Overhead Variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Question

Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:

The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

Answer

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Tags: Material Price Variances, Material Usage Variances, Operational Variances, Planning Variances, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2015

MA – May 2018 – L2 – Q3a – Standard Costing and Variance Analysis

Prepare profit statements for April and May using standard costing and absorption costing methods.

Question

a) Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:

	April	May
Production – units	2,000	2,500
Sales – units	1,500	3,000

Required:
Prepare a profit statement for each of the months April and May using:

Standard costing
Absorption costing

Answer

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Tags: Fixed Overheads, Profit Statement, Standard Costing, Variable Costs, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2018

MA – Nov 2018 – L2 – Q5b – Standard costing and variance analysis

Calculation and interpretation of efficiency, capacity, and production volume ratios for Ghana National Gas Company.

Question

Ghana National Gas Company is a gas processing company and has its plant located in Atuabo in the Western Region. The plant produces three gas products – Lean Gas (LG), Liquefied Petroleum Gas (LPG), and Natural Gas Condensate (NGC).

The standard time for the production of the products are:

LG – 40 minutes per metric tonne
LPG – 30 minutes per metric tonne
NGC – 45 minutes per metric tonne

The budget for the month of February is as follows:

LG – 45,000 metric tonnes
LPG – 25,000 metric tonnes
NGC – 30,000 metric tonnes

The actual data for the month were as follows:

Labour hours: 70,000 hours
Production: LG – 48,000 metric tonnes, LPG – 27,000 metric tonnes, NGC – 25,000 metric tonnes

Required:

i) Compute and interpret the efficiency ratio. (3 marks)

ii) Compute and interpret the capacity ratio. (3 marks)

iii) Compute and interpret the production volume or activity ratio. (3 marks)

Answer

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Tags: Capacity Ratios, Efficiency Ratios, Production Volume Ratios, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2018

MA – Nov 2018 – L2 – Q5a – Standard costing and variance analysis

Explanation of the interrelationship between variances and how material and labour variances can influence each other.

Question

With regard to variance analysis for all production costs (direct material, direct labour, and overhead), it is important to note that each variance does not represent a separate and distinct problem to be handled in isolation. All variances in one way or another are interdependent.

Required:

i) Explain what you understand by the term “inter-relationship between variances.” (2 marks)

ii) Explain possible reasons for inter-relationship between material variances and labour variances. Support your answer with examples. (4 marks)

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2018

MA – Nov 2020 – L2 – Q4b – Standard Costing and Variance Analysis

Discuss the advantages and disadvantages of using standard costing in cost management.

Question

b) Explain THREE (3) advantages and TWO (2) disadvantages of standard costing.

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

MA – Nov 2020 – L2 – Q3b – Standard Costing and Variance Analysis

Calculate various variances including sales volume contribution, price, mix, yield, labour rate, labour efficiency, and idle time variances for Zip Ltd.

Question

b) Zip Ltd, a premium food manufacturer, is reviewing its operations for a three-month period for 2019. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available:

Selling price: GH¢12.00
Direct material A: 2.5 kg at GH¢1.70 per kg
Direct material B: 1.5 kg at GH¢1.20 per kg
Direct labour: 0.45 hours at GH¢6.00 per hour
Fixed production overheads for the three-month period were expected to be GH¢62,500.

Actual data for the three-month period was as follows:

Sales and production: 48,000 units of ZP were produced and sold for GH¢580,800
Direct material A: 121,951 kg were used at a cost of GH¢200,000
Direct material B: 67,200 kg were used at a cost of GH¢84,000
Direct labour: Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of GH¢117,120
Fixed production overheads: GH¢64,000

Required: Calculate the following variances:

i) Sales volume contribution and sales price variances
ii) Price, mix, and yield variances for each material
iii) Labour rate, labour efficiency, and idle time variances

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

MA – May 2020 – L2 – Q3 – Standard costing and variance analysis, Advanced variance analysis, Budgetary control

Calculate and analyze material price, usage, mix, and yield variances and discuss weaknesses in traditional budgeting.

Question

Slab Processes (Ghana) Limited manufactures a single product. The product is manufactured in a single process, by combining three raw materials, A, B, and C.

For 2019, the standard cost of a litre of the product was established in the budget as follows:

Material	Quantity (litres)	Price per litre (GH¢)	Standard cost (GH¢)
A	0.7	2	1.4
B	0.4	4	1.6
C	0.1	8	0.8
Total	1.2		3.8
Loss in process	-0.2
Standard cost per litre of output	1.0		3.8

During one month in the year, 2,000 litres of finished products was the output from the process, and the actual direct material costs were as follows:

Material	Quantity (litres)	Cost (GH¢)
A	1,340	2,970
B	910	3,450
C	240	1,900
Total		8,320

Required:

a) Calculate the material price variance and the material usage variances for the period. (5 marks)

b) Analyze the operational usage variance into a materials mix and a materials yield variance. (6 marks)

c) Comment on the significance and usefulness of a materials mix and a materials yield variance, for management control purposes. (3 marks)

d) Describe briefly THREE (3) fundamental weaknesses in the traditional annual budgeting approach that exist regardless of the budgeting method that is used. (6 marks)

(Total: 20 marks)

Answer

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Topic: Standard Costing and Variance Analysis
Series: MAY 2020

MA – May 2019 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material variances and explain the significance of planning and operational variances.

Question

Emefa Ltd bakes cakes by mixing three ingredients, namely Flour, Sugar, and Butter, in the standard proportions of 5:3:2, respectively. However, the production process does not always mix the ingredients in these proportions, but the cake can be sold if the mixture is within certain limits.

The new production manager (a celebrity chef) has argued that the business should use only organic ingredients in its cake production. Organic ingredients are more expensive but should produce a product with an improved flavor and give health benefits for the customers. It was hoped that this would stimulate demand and enable an immediate price increase for the cakes.

The standard prices for the ingredients are:

Flour: GH¢ 2.50 per kilo
Sugar: GH¢ 3.00 per kilo
Butter: GH¢ 2.00 per kilo

There is a 5% normal loss in the production process.

The budget for production and sales in the period was 50,000 cakes. Actual production and sale of cake mixture was 228,000 kg. During the period, the inputs were as follows:

Ingredient	Kg	GH¢
Flour	96,000	249,600
Sugar	72,000	216,000
Butter	50,000	105,000

Required:
a) Calculate the following variances:
i) Material Mix Variance (3 marks)
ii) Material Yield Variance (3 marks)
iii) Material Usage Variance (3 marks)
b) Differentiate between planning variances and operational variances. (2 marks)
c) Explain why separating variances into their planning and operational components provides better information for planning and control purposes. (4 marks)

Answer

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Tags: Material variances, mix variance, Usage Variance, Variance Analysis, yield variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: MAY 2019

MA – Nov 2021 – L2 – Q3a – Standard Costing and Variance Analysis

Calculate and interpret the efficiency, capacity, and production volume ratios based on provided data.

Question

a) GG Ltd is into fuel processing and transportation. GG Ltd produces three types of fuel, namely: Petrol, Diesel, and Pre-mix fuel.

The standard time for the production of the fuel types are:

Petrol: 50 minutes per metric tonne
Diesel: 30 minutes per metric tonne
Pre-mix fuel: 45 minutes per metric tonne.

The production budget for August is as follows:

Petrol: 42,000 metric tonnes
Diesel: 60,000 metric tonnes
Pre-mix fuel: 45,000 metric tonnes

The actual data for the month were as follows:

Labour: 100,000 hours
Production:
- Petrol: 45,000 metric tonnes
- Diesel: 50,000 metric tonnes
- Pre-mix fuel: 40,000 metric tonnes.

Required:
Compute and interpret the following:
i) The efficiency ratio. (3 marks)
ii) The capacity ratio. (3 marks)
iii) The production volume or activity ratio. (4 marks)

Answer

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Tags: Capacity Ratio, Efficiency Ratio, Performance Measurement, Production Volume Ratio
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2021

MA – Nov 2021 – L2 – Q2d – Standard Costing and Variance Analysis

Explain different types of standards used in performance measurement.

Question

d) Standards are predetermined measurable quantities, set on defined conditions against which actual performance can be compared, usually for an element of work, operation, or activity. Standards are unit concepts that apply to particular products, individual operators, or processes.

Required:
Explain TWO (2) types of standards. (5 marks)

Answer

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Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2021

MA – May 2021 – L2 – Q4c – Standard costing and variance analysis Series

Explain two approaches used in establishing standard costs within an organization.

Question

c) State and explain TWO (2) approaches that can be used in setting a standard within an organisation.

(5 marks)

Answer

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Tags: Budgeting, Cost Control, Standard Costing
Level: Level 2