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Lecture 10 Slides with Solutions to Practice Exercises

Management Accounting Overview

  • Course: ACC5040

  • Semester: 1 – 2024/25

  • Lecture Focus: Standard Costing & Variance Analysis

  • Instructor Contact: Dr. Sarah G. Mohamed (Sarah.Mohamed@bcu.ac.uk)

Session Agenda

  1. Recap on Static and Flexible Budgets

  2. Discuss Level 3 of Variance Analyses for:

    • Direct Material (DM) costs

    • Direct Labour (DL) costs

    • Overhead costs

Static vs. Flexible Budgets

Static Budget

  • Refers to the Master Budget, a planning device for a specific budgeted output level at the beginning of the budget period.

  • Characteristics:

    • Fixed budget for planned output

    • Formula: Budgeted unit cost or price × Budgeted output level.

Flexible Budget

  • Acts as a control device that calculates budgeted revenue and costs based on actual output in the budget period.

  • Characteristics:

    • Flexible to varying output levels

    • Formula: Budgeted unit cost or price × Actual output level.

  • Facilitates Level 2 of Variance Analysis.

Level 3 of Variance Analysis

  • Applicable to all product costs.

  • Both DM and DL have price and efficiency variances with similar formulae.

  • Variable overhead variance depends on overhead allocation method.

  • Fixed overhead variance analysis mainly focuses on overhead spending variance.

Level 1 & Level 2 Variances

  • Actual Results for 10,000 units:

    • Sales Revenue: £1,250,000

    • Total Variable Costs:

      • DM: £621,600

      • DL: £198,000

      • V. MOH: £130,500

    • Total Contribution Margin: £299,900

    • Total Fixed Costs (TFC): £285,000

    • Operating Income: £14,900

  • Static and Flexible Budgets for 10,000 units:

    • Static Budget for 12,000 units Revenue: £1,440,000

    • Flexible Budget for 10,000 units Revenue: £1,200,000

Variance Analysis for Direct Materials

Direct Material Price Variance

  • Formula: Actual Quantity of inputs used × (Actual Price - Standard Price)

  • Example:

    • Actual usage: 10,000 x 2.22Kg = 22,200Kg with Cost: £28 per Kg

    • Price variance: £44,400 Favourable

Direct Material Efficiency Variance

  • Formula: (Actual Quantity used - Standard Quantity allowed for Actual Output) × Standard Price

  • Example:

    • DM Efficiency Variance: £66,000 Unfavourable

  • Total Flexible Budget Variance: £21,600 Unfavourable.

Direct Labour Cost Variances

Direct Labour Price Variance

  • Formula: Actual Quantity of Hours used × (Actual Rate - Standard Rate)

  • Example:

    • Actual Wage: £79,800 for 7,600 hours

    • Price Variance: £18,000 Unfavourable

Direct Labour Efficiency Variance

  • Formula: (Actual total hours used - Standard total hours allowed for actual output) × Standard Rate

  • Example:

    • Efficiency Variance: £20,000 Unfavourable

  • Total Flexible Budget Variance for DL = £38,000 Unfavourable.

Fixed Overhead Variances

  • Fixed costs spending variance = Flexible budget variable for Fixed Costs

    • Formula: Actual TFC - Budgeted TFC = £285,000 - £276,000 = £9,000 Unfavourable.

Exercises and MCQs

Exercise 1: Direct Materials and Labour Variances

  • Direct Material Standards:

    • 10 square yards at £5 per yard.

  • Direct Labour Standards:

    • 5 hours at £10.

  • Results for 1,500 curtains:

    • DM Price and Efficiency Variances Calculation.

Exercise 2: Apple Valley Orchards Variances

  • Standard Costs:

    • DM standard: 1.5 pounds at £7.25.

    • DL standard: 0.25 hours at £14.

    • Results for 1,200 pies produced using 1,875 pounds and 280 hours of labour.

Preparation for Next Week

  • Solve Seminar 11 exercises available on Moodle.

  • Attend Lecture 11 on Tuesday 3rd December covering Chapters 16 & 17: Standard Costing & Variance Analysis.