B 292,
Unit 4 - Session 4 , 5 , and 6
Activity 4.2:
A company has found its receipts from credit customers are typically as follows:
- 20 % received in the month of sales
- 50 % received one month after the sale
- 30% received two months after sales
Sales for November were $100,000 and were expected to increase by $ 8,000 per month.
Required: What are the receipts in January, February, and March?
Solution:
November / December / January / February / MarchSales / 100,000 / 108,000 / 116,000 / 124,000 / 132,000
Cash received:
November / 20,000 / 50,000 / 30,000
December / 21,600 / 54,000 / 32,400
January / 23,200 / 58,000 / 34,800
February / 24,800 / 62,000
March / 26,400
20,000 / 71,600 / 107,200 / 115,200 / 123,200
So the receipts in January are $ 107,200, in February are $ 115,200, and in March are 123,200.
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Activity 4.6:
Sales in a retail shop in November were $80,000, and will rise by $10,000 per month. Of sales, 60% are paid for the month following the sales and the rest un the next month. The gross profit percentage is %25, and each month enough goods are bought to match the next month's sales (in volume). Suppliers are paid one month after purchases are made. Each month wages amount to $ 4,000, rent and heating $2,000 and depreciation $400. A machine is to be bought in February for $10,000.the purchase of machine means that the monthly change for depreciation will increase by $166. The cash balance at 1 January is $12,000, and a cash flow forecast for January, February, and March is to be prepared.
Required:
(a)Work out the cash received from sales.
(b)Work out how much is bought each month and then what has to be paid to suppliers.
(c)Prepare the cash flow budget for the three months to the end of March.
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Solution:
(a) Cash received from cash
November / December / January / February / MarchSales / 80,000 / 90,000 / 100,000 / 110,000 / 120,000
Cash received from sales:
November / 48,000 / 32,000
December / 54,000 / 36,000
January / 60,000 / 40,000
February / 66,000
Total / 48,000 / 86,000 / 96,000 / 106,000
(b) How much is bought and what has to be paid to suppliers each month.
Gross profit = 25 %, then cost of sales = 75 %.
December / January / February / MarchSales / 90,000 / 100,000 / 110,000 / 120,000
Cost of sales / 67,500 / 75,000 / 82,500 / 90,000
Purchases / 75,000 / 82,500 / 90,000
Payment to suppliers / 75,000 / 82,500 / 90,000
(C) Cash flow budget
January / February / MarchCash received / 86,000 / 96,000 / 106,000
Cash payments:
Payments to suppliers / 75,000 / 82,500 / 90,000
wages / 4,000 / 4,000 / 4,000
Rent and heating / 2,000 / 2,000 / 2,000
Machine / 10,000
Total payments / 81,000 / 98,500 / 96,000
Cash balance brought forward / 12,000 / 17,000 / 14,500
Net inflow/outflow / 5,000 / (2,500) / 10,000
Cash balance carried forward / 17,000 / 14,500 / 24,500
Session (5)
Activity 5.2:
Below are the budgeted and actual production costs in a manufacturing company:
Cost / Budget / ActualDirect cost / 2,000 / 2,500
Direct labor / 2,000 / 3,500
Variable overheads / 4,000 / 3,000
Fixed overheads / 8,000 / 8,000
Required:
(a)Determine favorable and unfavorable variances for each cost type.
(b)List the main weaknesses of this comparison.
Solution:
Cost / Variance / Favorable/unfavorableDirect cost / 500 / U
Direct labor / 1,500 / U
Variable overheads / 1,000 / F
Fixed overheads / 0 / 0
b- It reveals nothing about the transformation of inputs into outputs, i.e., nothing about what was achieved by using physical resources. One problem is that is does not show the budgeted and actual levels of activity. However, flexible budgeting reflect changes in levels of activity.
5.5.3 Flexible Budgeting Example:
ABC company intended to produce 2,000 units, but actual units produced were 3,000 units, by using the following information, calculate the overall variance, activity variance, and spending variance for each type of cost.
Cost Type / Original Budget (2,000 units) / Actual Budget (3,000 u)Direct Material / 2,000 / 2,500
Direct Labor / 2,000 / 3,500
Variable Overhead / 4,000 / 3,000
Fixed overhead / 8,000 / 8,000
Solution:
Cost Type / Original Budget (2,000 units) / Flexed Budget (3,000 units) / Actual(3,000) / Overall Variance / Activity variance / Spending variance
D.M. / 2,000 / 3,000 / 2,500 / 500 adv / 1,000 adv / 500 fav
D. L / 2,000 / 3,000 / 3,500 / 1,500 adv / 1,000 adv / 500 adv
V. OH / 4,000 / 6,000 / 3,000 / 1,000 Fav / 2,000 adv / 3,000 fav
F.OH / 8,000 / 8,000 / 8,000
Hints:
(a)Overall variance = original budget – actual.
(b)Activity Variance = original budget – flexed budget.
(c)Spending variance = Flexed Budget – actual.
Session 6 Variance analysis
ABC company has the following information:
Detail / Original Budget / ActualProduction / 16,666 units / 16,000 units
Direct material / $33,332/ 16,666 kg / $32,220/ 18,000 kg
Direct labor / $25,000/ 4,166 hours / $25,200/ 3,600 hour
Variable overheads / $16,666 / $ 19,200
Fixed overheads / $ 12,500 / $13,000
- Budgeted selling price = $7, and actual selling price = $7.30 per unit.
- Total production are sold, i.e., there is no ending inventory.
- Standard quantity of direct material per unit = 1 kg.
- Standard price of direct material per unit = $2.
- Standard labor cost = $6/ hour.
- Standard labor quantity = 15 minutes.
- Standard variable overhead rate = $4 / hour.
Required:
(a)Calculate the profit variance before flexing the original budget.
(b)Calculate the profit variance after flexing the original budget.
(c)Calculate material variances, labor variances, variable overhead variance, fixed overhead variances, and sales variances.
(d)Reconcile budgeted profit and actual profit. P. 75
Solution:
1st requirement:Budget 16666 units / Actual16,000 units / Budgeted- actual
Sales revenues / $ 116,662 / $116,800 / 138 F
Less: variables costs
Direct material / 33,332 / 32,220 / 1,112 F
Direct labor / 25,000 / 25,200 / 200 U
Variable overheads / 16,666 / 19,200 / 2,534 U
Total variable costs / 74,998 / 76,620 / 1,622 U
Contribution / 41,664 / 40,180 / 1,484 U
Fixed overhead / 12,500 / 13,000 / 500 U
Profit / 29,164 / 27,180 / 1,984 U
2nd requirement:
Flex. Bud.16,000 u / Actual 16,000 units / Flexed- actual
Sales revenues / $ 112,000 / $116,800 / 4,800 F
Less: variables costs
Direct material / 32,000* / 32,220 / 220 adverse
Direct labor / 24,000** / 25,200 / 1,200 adverse
Variable overheads / 16,000*** / 19,200 / 3,200 adverse
Total variable costs / 72,000 / 76,620 / 4,620 adverse
Contribution / 40,000 / 40,180 / 180 F
Fixed overhead / 12,500 / 13,000 / 500 adverse
Profit / 27,500 / 27,180 / 320 adverse
*Direct material per unit = $33,332/16666 u = $2/u. So $2 × 16,000 = $32,000.
** Direct labor/ hour = $25,000/4,166 h = $6 / hour, but each unit consumes only 15 minutes, direct labor cost per unit = $6 /4 = $1.5. So total direct labor cost = $1.5 × 16,000= $24,000.
***Variable cost per unit = $ 16,666 / 16,666 u = $1/unit. So total variable overheads = $1 × 16,000 u = $ 16,000.
3-1 Material variance can be broken into price variance and quantity variance.
(a)Price variance = actual quantity × (standard price – actual price)
= 18,000 kg × ($2 - $1.79) = $3,780 Favorable.
(b)Quantity variance = standard price × (actual quantity – standard quantity of actual output)
= $2 × (18,000 kg – 16,000 kg) = $4,000 (adverse).
Hint: Standard quantity of actual output = standard quantity × actual output= 1 kg ×16,000 = 16,000 kg.
3-2 Labor variance can be broken into rate (price) variance and efficiency (quantity) variance.
(a)Labor rate variance= actual work hours × (standard rate/hour – actual rate/ hour).
=3,600h × ($6 - $7)= 3,600 (adverse).
(b)Labor efficiency variance = Standard rate × (standard hours for actual output – actual number of hours).
= $6 × (4,000 h – 3,600 h) = $2,400 (Favorable).
3-3 Variable overhead variance can be broken into expenditure (spending = price) variance, and efficiency (quantity) variance.
(a)VOH expenditure variance =
actual direct labor hours × (standard VOH rate/hour – actual VOH rate/hour).
= 3,600 h × ( 4 – 5.33) = $4,800 (adverse). This figure is rounded up from $ 4,788, as the rate is not exactly 5.33, but slightly more).
(b)VOH efficiency variance =
standard rate × (standard direct hours for actual output – actual number of direct hours worked)
= $4 × (4,000 h - 3,600 h) = $1,600 ( Favorable).
Standards direct hours = 4,166 hours, and budgeted production = 16,666 u, so 4,166 / 16,666 u = .25 , but the actual output = 16,000 u so .25 × 16,000 = 4,000 as standard direct hours for actual output.
Or : Standard hours (4,166 h) standard output (16,666 u )
Standard hours = ? actual output (16,000 u ).
Standard hours for actual output = (4,166 × 16,000 ) / 16,666 = 4,000 h.
3-4 Fixed overhead variance is a result of only expenditure or price not of quantity, because under marginal costing, it assumed that fixed production overheads should not vary with volume, and the entire fixed overhead is added.
Fixed overhead expenditure variance = budgeted fixed overheads – actual fixed overheads
$12,500 – 13,000 = $500 adverse.
3-5 Sales variance can be broken into sales price variance and sales volume variance:
(a)Sales price variance = actual sales volume × (actual price per unit – standard price per unit).
= 16,000 × ( $ 7.3 – $7) = $4,800 (Favorable).
(b)Sales Volume Variance = Standard Contribution per unit × (actual sales volume – budgeted sales volume)
= (41,664 / 16,666)× (16,000 – 16,666) = 2.5 × 666 = 1,665 (adverse).
Standard contribution = budgeted revenues – budgeted variable costs
4- Reconcile the budgeted profit and actual profit:
Flexed profit = $27,500
Actual profit= $ 27,180
Total variance =$ 320 Adverse
Variances:
Favorable / AdverseSales price / 4,800
Direct material price / 3,780
Direct material usage / 4,000
Direct labor rate / 3,600
Direct labor efficiency / 2,400
Variable overhead expenditure / 4,800
Variable overhead efficiency / 1,600
Fixed overhead expenditure / 500
Total variance / 12,580 / 12,900
Activity 6.7:
Assume that the standard labor rate for a unit is $ 9.80/ hour, and that a unit should take 15 hours. 2,000 units were made and 30,400 hours were paid for at a cost of 285,760. Hours worked were 28,000.
Required:
(a)What is the labor rate, idle time, and efficiency variance?
Solution:
(a)Actual labor costs = $ 285,760.
(b)Standard labor cost of actual production = 2,000 × 9.8 × 15= $294,000.
(c)Total variance = $8,240 (F).
(d)Idle time variance = standard rate/hour × (hours worked – hours paid for)
= $9.80 × (28,000 h – 30,400 h ) = 23,520 (adverse).
(e) Efficiency variance = standard rate/h × (standard hours for actual output – actual number of hours worked) = $9.80 × ( 30,000 - 28,000) = $ 19,600 (Fav)
= standard hours × actual output = 15 hours × 2,000 = 30,000 .
(e)Rate variance = actual number of hours worked × (standard rate/hour – actual rate/hour) = 30,400 × ( $9.80 - $ 9.40) = $ 12,160 (Fav).
Hint: The total variance = $ 8,240 F, this figure comes from ( 19,600 F + 12,160 F – 23,520 U) = $ 8,240 F.
Self-assessed questions:
Q4:Assume each of the following scenarios is independent:
1-The standard cost per kg of material is $11, and the standard usage is 13 kg per unit of output. 3,000 units were made and sold using 48,000 kg at a cost of $ 720,000. What are the total material cost, material price and material usage variances?
Solution:
(a) actual material cost = $ 720,000
Standard material cost = 11 × 13 × 3000 = $429.000
Total material cost variance = 720,000 – 429,000 = $291,000
(b)Material price variance = 48,000 × (11 – 15) = $ 192,000.
(c)Material usage variance = 11 × (48,000 – 39,000) = $ 99,000.
39,000 = 13 × 3000 = 39,000
2-The standard labor rate is $ 5.9 per hour and a unit of output should take 10 hours. 3,000 units were made and 15,150 hours were paid for at a cost of $93,930. Hours worked were 27,000. What are the labor rate, idle time and efficiency variances?
solution
(a)Labor rate variance = 30,300 × (5.9 – 6.20) = $ 9,090
(b)Idle time variance = $ 5.9 × (27,000 – 15,150) = $ 69,915.
(c)Labor efficiency variance= $ 5.9 × (30,000 – 27,000)= $17,700.
3-The standard variable rate is $7.10 per hour , and a unit of output should take 16 hours. 7,000 units were made for a total variable overhead cost of 910,000. Hours worked were 140,000. What are the variable overhead rate, efficiency and total variable overhead variances?
solution
(a)Variable overhead rate = 140,000 × (7.10 – 6.5) =$ 84,000.
(b)Efficiency variance = 7.10 × (112,000 – 140,000) = $ 198,800.
(c)Total variable overhead variance= ($7.10× 16 × 7,000) – 910,000 = $ 114,800
4-The standard contribution per unit is $11, budgeted selling price is $ 22 and budgeted sales are 6,000 units. 5,400 units were sold for $97,200. What are the sales price and sales volume variances?
solution
(a)Sales price variance = 5,400 × (18 – 22) = 21,600. adverse
(b)Sales volume variance= 11 × (5,400 – 6,000)= $ 6,600 adverse
(c)Total sales variance = 21,600 + 6,600 = 28,200. Adverse.
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