Performance Management

PERFORMANCE MANAGEMENT

WEEK 7- QUESTIONS

VARIANCE ANALYSIS

TOPIC: VARIANCE ANALYSIS CHAPTER 6.

Question ONE

GRV is a chemical processing company that produces sprays used by farmers to protect their crops. One of these sprays is made by mixing three chemicals. The standard material cost details for 1 litre of this spray is as follows:

0.4 litres of chemical A @ N30 per litre 12.00

0.3 litres of chemical B @ N20 per litre 6.00

0.5 litres of chemical C @ N15 per litre 7.50

Standard material cost of 1 litre of spray 25.50

During August GRV produced 1,000 litres of this spray using the following chemicals:

600 litres of chemical A costing N18,000

250 litres of chemical B costing N8,000

500 litres of chemical C costing N8,500

You are the Management Accountant of GRV and the Production Manager has sent you the following e-mail:

I was advised by our purchasing department that the worldwide price of chemical B had risen by 50%. As a result, I used an increased proportion of chemical A than is prescribed in the standard mix so that our costs were less affected by this price change.

Required:

(a) Calculate the following operational variances:

(i) direct material mix and (3 marks)

(ii) direct material yield (2 marks)

(b) Discuss the decision taken by the Production Manager. (5 marks)

QUESTION TWO

The following data were extracted from North-West Limited‟s records for July 2012 in respect of product OWL:

Standard Cost/unit N
Raw material (50kg @ N5 per kg) / 250
Labour (2 hours @ N60 per hour) / 120
370
Budget
Production / 2,000 Units
Fixed Overheads / N1,500,000
Variable Overheads / N1,800,000
Labour Hours / 4,000
Standard hours of production / 4,000
Actual
Production / 2,400 Units
Direct Material Purchased / 110,000kg @ N605,000
Opening Stock Direct Material / 1,000kg
Closing Stock Direct Material / 4,000kg
Wages paid (4,900 hours) / N318,500
Fixed Overhead / N1,650,000
Variable Overhead / N2,280,000

You are required to compute the following variances

a. Material price variance (2 Marks)

b. Material usage variance (2 Marks)

c. Labour rate variance (2 Marks)

d. Labour efficiency variance (2 Marks)

e. Variable overhead expenditure variance (2 Marks)

f. Variable overhead efficiency variance (2½ Marks)

g. Fixed overhead efficiency variance. (2½ Marks) (Total 15 Marks)

QUESTION THREE

Omololu operates a standard absorption costing system to control the manufacturing costs of its single products, “Bob Blocks”. The following standards have been set:

N/unit

Direct material 2kgs at N6/kg 12

Direct labour 1 hr at N7/hr 7

Fixed overheads 9

Total production cost 28

The fixed overhead standard cost per unit is based on a budgeted monthly production of 4,000 units.

Actual results for the most recent month were

Production 4,300 units

Direct material cost N56,000 for 9,000kgs

Direct labour cost N32,800 for 4,600 hours paid, only 4,000 hours were worked

Fixed overhead N35,000

No direct material inventories are held.

You are required to calculate the following variances:

(a) Direct material price (2 Marks)

(b) Direct material usage (2 Marks)

(d) Direct labour efficiency (2 Marks)

(e) Idle time (1 Mark)

(f) Fixed overhead expenditure (2 Marks)

(g) Fixed overhead volume (2 Marks)

(h) Fixed overhead capacity (2 Marks) (Total 15 Marks)