CIMA BA2 Syllabus C. PLANNING AND CONTROL - Overall Illustrations of Material / Labour / Variable Overhead Variances - Notes ^{6 / 9}

Standard cost card for the production of 1 car

Direct Materials 9kg at $80/kg = $720
Direct Labour 10 hours at $110/hour = $1,100

Total material and labour cost a $1,820

Actual results for the production of 10 cars

Materials 98kg costing $7,800
Labour 110 hours costing $11,000

What are the materials and labour variances?

Solution
Materials total variance
Should cost: 10 cars x $720 = $7,200
Did cost $7,800
= ($600) Adverse Materials Total Variance 40 - 640 = (600) Adverse as seen below
Materials price variance
Should cost: 98kg x $80/kg = $7,840
Did cost $7,800
Materials Rate Variance $7,840 - $7,800 = $40 Favourable (Cost less than standard)
Materials usage variance
10 cars
Should use 10 x 9kg = 90kg
Did use 98kg
Difference 8kg (Adverse - used more than standard
x $80/kg = $640 (Adverse)
Labour total variance
10 cars should cost x $1,100 = $11,000
10 cars did cost $11,000
Nil overall labour variance, let us investigate further!
Labour rate variance
Should cost: 110 hours x $110/hour = $12,100
Did cost $11,000
Labour Rate Variance is $1,100 Favourable (cost less than expected)
Labour efficiency variance
10 cars
Should take 10 x 10 hours = 100 hours
Did take 110 hours
Difference 10 hours (Adverse - used more than standard
x $100/kg = $1,100 (Adverse)
As we saw, the $1,100 Favourable variance is completely negated by the ($1,100) Adverse variance producing a Nil overall Labour variance.

Standard cost card for the production of 1 car

Direct Materials 10kg at $80/kg = $800
Direct Labour 12 hours at $100/hour = $1,200

Total material and labour cost a $2,000

Actual results for the production of 10 cars

Materials 98kg costing $7,800
Labour 110 hours costing $11,000

What are the materials and labour variances?

Solution
Materials total variance
Should cost: 10 cars x $800 = $8,000
Did cost $7,800
= $200 Favourable Materials Total Variance ($40 + $160) - as seen below
Materials price variance
Should cost: 98kg x $80/kg = $7,840
Did cost $7,800
Materials Rate Variance $7,840 - $7,800 = $40 Favourable (Cost less than standard)
Materials usage variance
10 cars
Should use 10 x 10kg = 100kg
Did use 98kg
Difference 2kg (Favourable - used less than standard
x $80/kg = $160 Favourable
Labour total variance
10 cars should cost x $1,200 = $12,100
10 cars did cost $11,000
Overall $1,100 Labour variance - let us investigate further
Labour rate variance
Should cost: 110 hours x $100/hour = $11,000
Did cost $11,000
Labour Rate Variance is Nil
Labour efficiency variance
10 cars
Should take 10 x 12 hours = 120 hours
Did take 110 hours
Difference 10 hours (Favourable, took less time than standardx $100/kg = $1,000 Favourable
Overall labour variance is $1,000 (0 + $1,000)

Standard cost card for the production of 1 car

Direct Materials 6kg at $1,000/kg = $6,000
Direct Labour 10 hours at $100/hour = $1,000
V. Ovhd 10 hours at $4/hour = $40

Total standard cost per car $7,040

Actual results for the production of 10 cars

Materials 58kg costing $6,100
Labour 86 hours costing $9,100
Variable overhead $360

What are the materials, labour and variable overhead variances?

Solution
Materials total variance
Should cost: 10 cars x $1,000 = $6,000
Did cost $6,100
= ($1,000) Adverse Materials Total Variance ($2,000 - $3,000) - as seen below
Materials price variance
Should cost: 58kg x $1,000/kg = $5,800
Did cost $6,100
Materials Rate Variance $5,800 - $6,100 = $3,000 Adverse (Cost more than standard)
Materials usage variance
10 cars
Should use 10 x 6kg = 60kg
Did use 58kg
Difference 2kg (Favourable - used less than standard
x $1,000/kg = $2,000 Favourable
Labour total variance
10 cars should cost x $1,000 = $10,000
10 cars did cost $9,100
Overall $900 Favourable Labour variance - let us investigate further
Labour rate variance
Should cost: 86 hours x $100/hour = $8,600
Did cost $9,100
Labour Rate Variance ($500) Adverse
Labour efficiency variance
10 cars
Should take 10 x 10 hours = 100 hours
Did take 86 hours
Difference 14 hours Favourable, took less time than standard $100/hour = $1,400 Favourable
Overall labour variance is $900 ($1,400 + $500)
Variable overhead variance
Variable overhead rate variance
86 hours should pay x $4 = $344
86 hours did pay $360
($16) Adverse variable overhead rate variance
Labour efficiency variance
10 cars
Should take 10 x 10 hours = 100 hours
Did take 86 hours
Difference 14 hours (Favourable, took less time than standard $4/hour = $56 Favourable
Overall variable overhead variance is $40 ($56 - $16)

Product A has these standards:

Direct materials 2kg at $10/kg

100 units were produced

There was an adverse materials usage variance of ($50)

How many kg of material were actually used?

Adverse variance (50) = Adverse kg x Standard cost per kg = 10/kg

Therefore, 5kg more were used than should have been.

To produce 100 units x 2kg should be used per unit = 200kg + 5kg (more used) = 205kg were actually used.