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.