PP Ltd has prepared the following standard cost information for one unit of product X: Direct materials 2 kg @ £13/kg £26.00 Direct labour 3.3 hours @ £12/hour £39.60 Variable overheads 3.3 hours @ £2.50 £8.25 Actual results for the period were recorded as follows: Production 12,000 units

Question

PP Ltd has prepared the following standard cost information for one unit of product X:

Direct materials          2 kg @ £13/kg                           £26.00
Direct labour    3.3 hours @ £12/hour            £39.60
Variable overheads                 3.3 hours @ £2.50    £8.25

Actual results for the period were recorded as follows:

Production                                   12,000 units
Materials – 26,400 kg               £336,600
Labour – 40,200 hours             £506,520
Variable overheads    £107,250

All of the materials were purchased and used during the period.
The direct material price and usage variances are:

                Material price Material usage
(A)           £6,600F £31,200A
(B)           £6,600F                       £31,200F
(C) £31,200F                     £6,600A
(D)          £31,200                      A £6,600A

Question 35 Variance analysis
The direct labour rate and efficiency variances are:

             Labour rate         Labour efficiency
(A)        £24,120F    £7,200F
(B)       £24,120A                £7,200A
(C)       £24,120A    £7,560A
(D)      £31,320A                £7,200A

Question 36 Variance analysis
The variable overhead expenditure and efficiency variances are:

Expenditure       Efficiency
(A) £6,750A           £1,500A
(B)         £6,750A           £1,500F
(C)         £8,250A £1,500A
(D) £8,250F           £1,500F

Accepted Answer

● Remember that all the ‘ quantity ’ variances (material usage, labour efficiency and variable overhead efficiency) are valued at the standard rate rather than at the actual rate. Therefore the material usage variance in kg should be multiplied by the standard price per kg to determine the monetary value of the material usage variance.

Answer: (A)

Material price variance                                                                     £
Standard cost of materials used 26,400 kg × £13    343,200
Actual cost                                                                                    336,600
[latex][/latex] 6,600 F
Material usage variance    Kg
Standard usage 12,000 units × 2 kg    24,000
Actual usage                                                       26,400
[latex][/latex]                                                                              2,400 × £13/kg = £31,200 A

Solution 35
● Once again, remember to use the standard rate per hour to evaluate the labour efficiency variance.

Answer: (B)

Labour rate variance                                                          £
Standard cost of hours used 40,200 × £12 482,400
Actual labour cost                                                        506,520
[latex][/latex]                                                                                          24,120 A
Labour efficiency variance                               Hours
Standard time 12,000 units × 3.3 hours        9,600
Actual time    40,200
[latex][/latex]                                                                               600 × £12/hour = £7,200 A
Solution 36
● Remember that the variable overhead efficiency variance is directly related to the labour efficiency variance
Answer: (A)

Variable overhead expenditure variance    £
40,200 hours of variable overhead should cost ( × £2.50)    100,500
But did cost                                                                                      107,250
[latex][/latex]   6,750 adverse

Variable overhead efficiency variance
Efficiency variance in hours, from labour efficiency variance     600 adverse
× standard variable overhead rate per hour                                   ×£2.50
[latex][/latex]      £1,500 adverse

Question 12.RQ.34: PP Ltd has prepared the following standard cost information ...

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