STANDARD COSTING AND VARIANCE

ANALYSIS

Question 1 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 2020 Q 1

Venus Limited (VL) is engaged in the business of processing and selling cashew nuts. It
purchases raw cashew nuts which are then processed and packaged before selling to
consumers.
VL uses standard costing system. The standard cost card for the month of February 2020 is
given below:

Direct material 1.75 tonnes of raw cashew nuts at Rs. 50,000 per tonne.
Direct labour 8 hours at Rs. 300 per hour (idle time is estimated at 5% of total time)
Fixed production Rs. 275 per direct labour hour for budgeted production of 17,500 tonnes of processed and
overhead packaged cashew nuts

(i) Actual results for the month of February 2020:

(ii) 17,050 tonnes were produced.
(iii) 31,500 tonnes of direct material at Rs. 46,500 per tonne were purchased and
consumed during the month.
(iv) Each tonne of processed cashew nuts took 7 hours to produce and direct labour was
paid at Rs. 375 per hour.
(v) Scheduled maintenance of machine was not carried out which reduced the idle time
to 4%. Fixed production overhead amounting to Rs. 32 million was incurred during
the month.
VL’s actual profit for the month of February 2020 was higher than the budgeted profit. Views
of three department heads on high profitability are as follows:
 Head of purchase department
Despite stable prices of raw cashew nuts in the market for last three years, his
department has saved significant cost by purchasing material from a new supplier at
a relatively cheaper rate by goo
 Head of production department
His team’s decision to increase labour rate has resulted in an increased motivation
and overall efficiency of workers which led to the increase in VL’s profitability.
 Head of maintenance department
Delaying the scheduled maintenance of machines has contributed to VL’s profitability.
The machines are running well, therefore, scheduled maintenance can be delayed for
another month.

Required:
a) Calculate the following variances for the month of February 2020:
 All material variances
 All labour variances
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 Fixed production overhead expenditure variance (08)
b) Critically evaluate the views of departmental heads. Your evaluation should include
the discussion of claims made and likely impact of their decisions on the long-term
profitability of VL.

Question 2 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -AUTUMN 2019 Q 4

Following information pertains to Espresso Limited (EL), engaged in manufacturing of a

product ‘Rita’:
(i) Extracted from last year’s records:
 EL budgeted to produce 16,000 units of Rita by utilizing 32,000 budgeted
machine hours.
 The absorption rate for fixed overheads was determined at Rs. 1,250 per machine
hour.
 Actual fixed overheads incurred were Rs. 41.20 million that included depreciation
of Rs. 12.50 million.
 The actual production was 17,000 units by utilizing 32,400 machine hours.
(ii) EL absorbs fixed overheads by using pre-determined machine hour rate.
(iii) For the next year, the management of EL has made the following projections:
 Production and demand for Rita is expected to increase by 15%. EL is intending
to buy a new automated machinery costing Rs. 7.3 million to increase the actual
efficiency by 25%. The new machinery would have a useful life of 8 years with
residual value of Rs. 1 million.
 Existing fixed overheads other than depreciation are expected to increase by
10%. Additional supervision cost would need to be incurred at Rs. 70,000 per
month.
Required:
a) Compute under/over absorption of fixed overheads for the last year and analyze it
into fixed overhead expenditure, efficiency and capacity variances. (06)
b) Determine fixed overheads absorption rate for the next year.

Question 3 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 2019 Q 5

Daisy Limited (DL) manufactures and markets product Zee. DL uses standard absorption
costing. Following information pertains to product Zee for the month of February 2019.
(i) Data extracted from the budget for the month of February 2019:
Production Units 27,000
Cost of production: Rs in 000
Direct material (X: 16,000 kg @ Rs. 400 per kg) 6,400
Y: 14,000 kg @ Rs. 300 per kg 4,200
Direct labour (10,000 hours @ Rs. 220 per hour) 2,200
Factory overheads (including fixed overheads of Rs. 900,000) Rs. 250 per 2,500
labour hour
(ii) Actual input ratio of X and Y was 55:45 respectively.

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(iii) Direct materials are added at the beginning of the process. Actual process losses
were 6% of the output. There is no change in the direct material prices during the
month.
(iv) DL increased wages by 12% as against the budgeted increase of 8% which improved
labour efficiency by 5%.
(v) Due to higher-than-expected inflation, actual factory overhead rate was 6% higher
than the budgeted rate.
(vi) Conversion costs were incurred evenly throughout the process. (vii) 27,400 units of
Zee were transferred to finished goods. There was no opening or closing work in
process. Finished goods inventory at the beginning and closing of the month was
1,000 units and 1,500 units respectively.

Required:
Compute the following:
a) Material price, mix and yield variances (06)
b) Labour rate and efficiency variances (04)
c) Over/under applied overheads and analyze it into:
(i) variable overhead expenditure and efficiency variances
(ii) fixed overhead expenditure and volume variances

Question 4 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 2018 Q 5

MZ Limited (MZL) manufactures a single product X and uses standard marginal costing
system. The standard cost card of product X is as follows:
Following data is available in respect of operations for the month of February 2018:
(i) 55,000 units were put into process. 1,500 units were lost in process which were
considered to be normal loss. Process losses occur at the end of the process
Rs.
Raw material (13 kg @ Rs. 135 per kg) 1,755
Labour (14 hours @ Rs. 100 per hour) 1,400
Variable production overheads (Rs. 75 per labour hour) 1,050

(ii) 698,000 kg of material was purchased at Rs. 145 per kg. Material is added at the
start of the process and conversion costs are incurred evenly throughout the process.
(iii) 755,000 labour hours were worked during the month. However, due to certain labour
related issues, wages were paid at Rs. 115 per hour.
(iv) Fixed production overheads are budgeted at Rs. 40 million for the month of February
2018. Total actual production overheads amounted to Rs. 95 million. Actual fixed
production overheads exceeded budgeted fixed overheads by Rs. 1.1 million.
(v) Inventory balances were as under:
01 February 2018 28 February 2018
Raw material (kg) 15,000 17,000
Work in process (units 5,000 (60% converted) 6,000 (80% converted)
Finished goods (units 10,000 12,000

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(vi) MZL uses FIFO method for valuing the inventories

Required: Compute material, labour and overhead variances

Question 5 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -AUTUMN 2017 Q 7

Following information has been extracted from the records of Silver Industries Limited (SIL)
for the month of June 2017:
Production units Direct labour Variable & fixed
hours overheads (Rs.)
Available capacity 10,000 30,000
Budget 8,000 24,000 3,600,000
Actual 8,600 25,000 3,900,000

Fixed overheads were budgeted at Rs. 1,200,000. Applied fixed overheads exceeded actual
fixed overheads by Rs. 20,000.
SIL uses standard absorption costing. Over/under applied factory overheads are charged to
profit and loss account.

Required:
a) Prepare accounting entries to record the factory overheads
b) Analyse under/over applied overheads into expenditure, efficiency and capacity
variances.

Question 6 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 2017 Q 6(b)

Hexa Limited is using a standard absorption costing system to monitor its costs. The
management is considering to adopt a marginal costing system. In this respect, following
information has been extracted from the records for the month of December 2016:
(i) Actual as well as budgeted sale was 10,500 units at Rs. 2,000 per unit.
(ii) Standard cost per unit is as follow
Rs.
Direct material (5 kg @ Rs. 158) 790
Direct labour (3 hours @ Rs. 150) 450
Production overheads (fixed & variable) Rs. 120 per labour hour 360
1,600

(iii) Budgeted fixed overheads were Rs. 1,650,000.

(iv) Production and actual costs were as under:

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Production: Budgeted 11,000

Actual 12,000
Rs.
Actual variable costs:
Direct material (58,000 kg @ Rs. 160) 9,280,000
Direct labour (35,000 hours @ Rs. 155) 5,425,000
Variable overheads 2,975,000
(v) Applied fixed overheads exceeded actual overheads by Rs. 200,000.
(vi) There was no opening finished goods inventory. Closing finished goods inventory was
1,500 unit

Required:
a) Compute the profit for the month of December 2016, using standard marginal costing.
b) Reconcile the profit computed above with actual profit under marginal costing, by
incorporating the related variances.
c) Reconcile the actual profit under marginal and absorption costing.

Question 7 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -AUTUMN 2016 Q

Zamil Industries (ZI) produces and markets an industrial product Zeta. ZI uses standard
absorption costing system. The break-up of Zeta’s standard cost per unit is as under:
Rs.
Materials: Axe – 1 kg 160
Zee – 2 kg 210
Direct labour – 0.8 hours 200
Overheads – 0.8 hours 180

Production of Zeta for the month of August 2016 was budgeted at 15,000 units. Information
pertaining to production of Zeta for August 2016 is as under:
(i) Raw material inventory is valued at lower of cost and net realizable value. Cost is
determined under FIFO method. Stock cards of materials Axe and Zee are reproduced
below:

Date Description axe Zee

Kg Cost per kg (Rs) Kg Cost per kg
1-Aug Opening balance 9,000 150 4,000 120
8,000 122
3-Aug Purchase returns (2,000) 122
4-Aug Purchases 17,000 148 35,000 125
6-Aug Issues to production (16,000) (29,000)

(ii) Actual direct wages for the month were Rs. 3,298,400 consisting of 11,780 direct
labour hours.

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(iii) Fixed overheads were estimated at Rs. 540,000 based on budgeted direct labour
hours.
(iv) The actual fixed overheads for the month were 583,000.

Actual sales of Zeta for the month of August 2016 was 12,000 units. Opening and closing
finished goods inventory of Zeta was 5,000 and 8,500 units respectively.

Required:
a) Compute following variances:
(i) Material price, mix and yield variances
(ii) Labour rate and efficiency variances
b) Compute applied fixed overheads and analyse ‘under/over applied fixed factory
overheads’ into expenditure, efficiency and capacity variances.

Question 8 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 2016 Q 3(b)

Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the
month of December 2015 from SE's budget document for the year 2015.
Rs. in million
Sales 9,800 units 25.00
Cost of production of 10,000 units:
Direct material 5,000 kg 9.00
Direct labour 24,000 hrs 3.60
Variable overheads 2,000 machine hrs 4.40
Fixed overheads 3.80

Actual production for the month of December 2015 was 12,000 units whereas SE earned
revenue of Rs. 30 million by selling 11,000 units of Bela. Following information pertains to
actual cost of production for the month:
(i) 5,700 kg material was issued to production. Raw materials are valued using FIFO
method. Other details relating to the raw material used for Bela are as follows:
kg Rs. in million
1-Dec-2015 Opening balance 3,000 5.70
10-Dec-2015 Purchases 15,000 26.25

(ii) To minimise labour turnover, SE increased production wages by 10% above the
standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget
(iii) 2,100 machine hours were worked. Details of overheads are as under: Depreciation
amounted to Rs. 1.6 million (same as budgeted) Factory building rent amounted to
Rs. 1.20 million (same as budgeted) All other overheads were 4% in excess of the
budget
(iv) Variances are treated as period cost and charged to cost of sales
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(v) There was no opening finished goods inventory of Bela. Actual closing inventory may
be valued at standard marginal production costs

Required:
a) Compute budgeted and actual profits of Bela for the month of December 2015 using
marginal costing.
b) Reconcile the budgeted profit with actual profit using relevant variances under
marginal costing

Question 9 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -SPRING 15 Q3

Sigma Limited (SL) is a manufacturer of Product A. SL operates at a normal capacity of 90%

against its available annual capacity of 50,000 machine hours and uses absorption costing.
The following summarised profit statements were extracted from SL's budget for the year
ending 31 December 2015.
Actual - 2014 Budget - 2015
units Rs. in 000 Units Rs. in 000
Sales 4,125 49,500 4,600 56,580
Opening inventory 400 (3,400) 600 (5,400)
Cost of production 4,325 (38,925) 4,500 (44,325)
Closing inventory 600 5,400 500 4,925
Under absorbed production overheads (100) -
Selling and administration cost (30% fixed) (3,000) (5,250)
Net profit 9,475 6,530

Other relevant information is as under:

2014 Budget 2015
Standard machine hours per unit 10 hours 10 hours
Standard production overhead rate per unit (Rs.) 2,000 2,250
Estimated fixed production overheads at normal capacity (Rs.) 3,600,000 4,050,000
Actual production overheads (Actual machine hours 44,000) (Rs.) 8,750,000 -

Required:
a) What do you understand by under/over absorbed production overheads? (02) (
b) Analyse the under absorbed production overheads of SL for the year ended 31
December 2014, into spending and volume variances. Give two probable reasons for
each variance.

Question 10 ICAP COST ACCOUNTING & MANAGEMENT ACCOUNTING -AUTUMN Q4

Hexa Limited is a manufacturer of various machine parts. Following information has been
extracted from the cost records of one of its products AXE for the month of June 2014:
(i) Standard cost per unit:
Rs.
Raw material 170.00
Direct labour (1.25 hours) 150.00
Overheads 137.50
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(ii) Based on normal capacity of 128,000 direct labour hours, fixed overheads are
estimated at Rs. 2,560,000.
(iii) Following information pertains to production of 100,000 units of product AXE:
Actual direct labour hours worked 130,000
Rs.
Unfavorable material usage variance 820,000
Unfavorable material price variance 600,000
Actual direct labour cost 16,250,000
Actual fixed and variable overheads 15,500,000

Required:
a) Compute the following for the month of June 2014:
b) Actual material cost
c) Labour variances
d) Overhead variances, using four variance method

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