Variance Analysis Question

WICB Limited is a manufacturer of cricket bats. It uses a standard absorption costing system to monitor performance of managers and departments. A standard absorption cost card for one of its models, the Boundary, is given below:

$ $

Selling price 250.00

Production costs:

Direct material: 12 metres at $1.50 per metre 18.00

Direct labour: 4 hours at $6.00 per hour 24.00

Variable overhead: 4 hour at $15.00 per hour 60.00

Fixed overhead: 4 hour at $10.00 per hour 40.00

142.00

Gross Profit $108.00

Budgeted production and sales are 1,000 Boundary per month.

Actual results for the manufacture and sale of Boundary for the most recent month were as follows:

Sales: 1,200 bats at $240.00 each.

Production: 1,300 bats

Direct material (purchased and used): 1,600 metres at $1.40 per metre

Direct labour (worked and paid): 5,000 hours at $6.00 per hour

Variable overhead $75,500

Fixed overheads $54,600

There were no opening stocks of finished goods.

Required:

a) Calculate the following variances for the most recent month

i) Direct material price;

ii) Direct material usage;

iii) Direct labour rate;

iv) Direct labour efficiency;

v) Variable overhead expenditure;

vi) Variable overhead efficiency;

vii) Fixed overhead expenditure;

viii) Fixed overhead capacity;

ix) Fixed overhead efficiency;

x) Sales volume (in terms of profit);

xi) Sales price. (22 marks)

b) Some authorities view traditional variance analysis as unhelpful and misleading in modern business organizations.

Explain THREE problems of standard costing variance analysis in today’s business world.

(3 MARKS)

TOTAL MARKS