Question
QUESTION FOUR [20]
A Ltd operates a system of standard costs.
The following information is available:
Actuals R
Materials consumed (3 600 units at R52,50 per unit) 189 000
Direct wages 22 100
Variable expenses 62 000
Fixed expenses 188 000
Output during the period was 3 500 units of finished product.
For the above period, the standard production capacity was 4 800 units.
The break up of standard costs per unit were:
R
Materials (one unit at R50 per unit) 50
Direct wages 6
Variable expenses 20
Fixed exenses 40
116
The standard wages per unit is based on 9 600 hours for the above at a rate of R3 per hour. 6
400 hours were actually worked during the period under review and in addition, wages
for 400 hours was paid compensate for idle time due to a breakdown of a machine.
This increased the overall wage rate to R3,25 per hour
Required:
Please calculate the following variances:
4.1 Material price variance (3)
4.2 Material usage variance (3)
4.3 Labour rate variance (3)
4.4 Labour efficiency variance (3)
4.5 Variable expenses variance (2)
4.6 Fixed overhead expenditure variance (2)
Denote a favourable variance with an ‘(F)’ and un unfavourable variance with a ‘(U)’.
4.7 What possible measures can A Ltd put in place to ensure that its overall wage rate is
reduced to a minimum by machine breakdowns in future?
A Ltd operates a system of standard costs.
The following information is available:
Actuals R
Materials consumed (3 600 units at R52,50 per unit) 189 000
Direct wages 22 100
Variable expenses 62 000
Fixed expenses 188 000
Output during the period was 3 500 units of finished product.
For the above period, the standard production capacity was 4 800 units.
The break up of standard costs per unit were:
R
Materials (one unit at R50 per unit) 50
Direct wages 6
Variable expenses 20
Fixed exenses 40
116
The standard wages per unit is based on 9 600 hours for the above at a rate of R3 per hour. 6
400 hours were actually worked during the period under review and in addition, wages
for 400 hours was paid compensate for idle time due to a breakdown of a machine.
This increased the overall wage rate to R3,25 per hour
Required:
Please calculate the following variances:
4.1 Material price variance (3)
4.2 Material usage variance (3)
4.3 Labour rate variance (3)
4.4 Labour efficiency variance (3)
4.5 Variable expenses variance (2)
4.6 Fixed overhead expenditure variance (2)
Denote a favourable variance with an ‘(F)’ and un unfavourable variance with a ‘(U)’.
4.7 What possible measures can A Ltd put in place to ensure that its overall wage rate is
reduced to a minimum by machine breakdowns in future?
Answers
GPT-4o mini
To calculate the variances for A Ltd, we will follow the definitions of the various variances as set forth in standard costing. Below are the calculations for each required variance based on the given information.
### 4.1 Material Price Variance
Material Price Variance (MPV) = (Actual Price - Standard Price) × Actual Quantity
- **Actual Price per unit** = Total Actual Cost / Quantity
- Actual Price = R189,000 / 3,600 units = R52.50
- **Standard Price per unit** = R50
- **Actual Quantity Used** = 3,600 units
\[
MPV = (R52.50 - R50) \times 3,600 = R2.50 \times 3,600 = R9,000 \, (U)
\]
### 4.2 Material Usage Variance
Material Usage Variance (MUV) = (Actual Quantity Used - Standard Quantity Allowed) × Standard Price
- **Standard Quantity Allowed** = Output × Standard Quantity per unit
- Standard Quantity per unit = 1 unit
- Standard Quantity Allowed for 3,500 units = 3,500 units
\[
MUV = (3,600 - 3,500) \times R50 = 100 \times R50 = R5,000 \, (U)
\]
### 4.3 Labour Rate Variance
Labour Rate Variance (LRV) = (Actual Rate - Standard Rate) × Actual Hours Worked
- **Actual Hours Worked** = 6,400 hours + 400 hours (idle time) = 6,800 hours
- **Actual Rate** = Total Wages / Actual Hours Worked
- Actual Rate = R22,100 / 6,800 hours = R3.25
- **Standard Rate** = R3
\[
LRV = (R3.25 - R3) \times 6,800 = R0.25 \times 6,800 = R1,700 \, (U)
\]
### 4.4 Labour Efficiency Variance
Labour Efficiency Variance (LEV) = (Actual Hours Worked - Standard Hours Allowed) × Standard Rate
- **Standard Hours Allowed** = Output × Standard Hours per unit
- Standard Hours required for 3,500 units = 3,500 \times (9,600 standard hours / 4,800 standard units) = 3,500 \times 2 = 7,000 hours
\[
LEV = (6,800 - 7,000) \times R3 = (-200) \times R3 = -R600 \, (F)
\]
### 4.5 Variable Expenses Variance
Variable Expenses Variance = Actual Variable Expenses - Budgeted Variable Expenses
- **Budgeted Variable Expenses** = Output × Standard Variable Expense per unit
- Variable Expense per unit = R20
- Budgeted Variable Expenses = 3,500 x R20 = R70,000
\[
Variable \, Expenses \, Variance = R62,000 - R70,000 = R8,000 \, (F)
\]
### 4.6 Fixed Overhead Expenditure Variance
Fixed Overhead Expenditure Variance = Actual Fixed Expenses - Budgeted Fixed Expenses
- **Budgeted Fixed Expenses** = Based on standard capacity
- Standard Fixed Overhead per unit = R40, hence for 4,800 units = 4,800 x R40 = R192,000
\[
Fixed \, Overhead \, Expenditure \, Variance = R188,000 - R192,000 = R4,000 \, (F)
\]
### 4.7 Measures to Reduce Overall Wage Rate Due to Machine Breakdowns
To ensure that overall wage rates are minimized and that machine breakdowns do not lead to additional labor costs, A Ltd can implement the following measures:
1. **Preventive Maintenance**: Establish a scheduled maintenance program to decrease the likelihood of machine breakdowns, ensuring that machines are regularly serviced and potential issues are addressed proactively.
2. **Training and Development**: Provide training for operators to ensure they can handle equipment properly and identify potential issues before they become major problems.
3. **Invest in Technology**: Upgrade machinery with newer, more reliable technology that is less prone to breakdowns, which would also increase overall productivity.
4. **Better Planning and Scheduling**: Improve production scheduling to avoid peak operation times where breakdown is more likely (for instance, reducing use during high-stress periods).
5. **Cross-Training Employees**: Train employees in multiple roles so that they can step in and fill other positions when one machine goes down or when additional labor resources are needed to maintain productivity during breakdown situations.
By implementing these measures, A Ltd can mitigate the impact of machine breakdowns on labor costs and overall efficiency.
### 4.1 Material Price Variance
Material Price Variance (MPV) = (Actual Price - Standard Price) × Actual Quantity
- **Actual Price per unit** = Total Actual Cost / Quantity
- Actual Price = R189,000 / 3,600 units = R52.50
- **Standard Price per unit** = R50
- **Actual Quantity Used** = 3,600 units
\[
MPV = (R52.50 - R50) \times 3,600 = R2.50 \times 3,600 = R9,000 \, (U)
\]
### 4.2 Material Usage Variance
Material Usage Variance (MUV) = (Actual Quantity Used - Standard Quantity Allowed) × Standard Price
- **Standard Quantity Allowed** = Output × Standard Quantity per unit
- Standard Quantity per unit = 1 unit
- Standard Quantity Allowed for 3,500 units = 3,500 units
\[
MUV = (3,600 - 3,500) \times R50 = 100 \times R50 = R5,000 \, (U)
\]
### 4.3 Labour Rate Variance
Labour Rate Variance (LRV) = (Actual Rate - Standard Rate) × Actual Hours Worked
- **Actual Hours Worked** = 6,400 hours + 400 hours (idle time) = 6,800 hours
- **Actual Rate** = Total Wages / Actual Hours Worked
- Actual Rate = R22,100 / 6,800 hours = R3.25
- **Standard Rate** = R3
\[
LRV = (R3.25 - R3) \times 6,800 = R0.25 \times 6,800 = R1,700 \, (U)
\]
### 4.4 Labour Efficiency Variance
Labour Efficiency Variance (LEV) = (Actual Hours Worked - Standard Hours Allowed) × Standard Rate
- **Standard Hours Allowed** = Output × Standard Hours per unit
- Standard Hours required for 3,500 units = 3,500 \times (9,600 standard hours / 4,800 standard units) = 3,500 \times 2 = 7,000 hours
\[
LEV = (6,800 - 7,000) \times R3 = (-200) \times R3 = -R600 \, (F)
\]
### 4.5 Variable Expenses Variance
Variable Expenses Variance = Actual Variable Expenses - Budgeted Variable Expenses
- **Budgeted Variable Expenses** = Output × Standard Variable Expense per unit
- Variable Expense per unit = R20
- Budgeted Variable Expenses = 3,500 x R20 = R70,000
\[
Variable \, Expenses \, Variance = R62,000 - R70,000 = R8,000 \, (F)
\]
### 4.6 Fixed Overhead Expenditure Variance
Fixed Overhead Expenditure Variance = Actual Fixed Expenses - Budgeted Fixed Expenses
- **Budgeted Fixed Expenses** = Based on standard capacity
- Standard Fixed Overhead per unit = R40, hence for 4,800 units = 4,800 x R40 = R192,000
\[
Fixed \, Overhead \, Expenditure \, Variance = R188,000 - R192,000 = R4,000 \, (F)
\]
### 4.7 Measures to Reduce Overall Wage Rate Due to Machine Breakdowns
To ensure that overall wage rates are minimized and that machine breakdowns do not lead to additional labor costs, A Ltd can implement the following measures:
1. **Preventive Maintenance**: Establish a scheduled maintenance program to decrease the likelihood of machine breakdowns, ensuring that machines are regularly serviced and potential issues are addressed proactively.
2. **Training and Development**: Provide training for operators to ensure they can handle equipment properly and identify potential issues before they become major problems.
3. **Invest in Technology**: Upgrade machinery with newer, more reliable technology that is less prone to breakdowns, which would also increase overall productivity.
4. **Better Planning and Scheduling**: Improve production scheduling to avoid peak operation times where breakdown is more likely (for instance, reducing use during high-stress periods).
5. **Cross-Training Employees**: Train employees in multiple roles so that they can step in and fill other positions when one machine goes down or when additional labor resources are needed to maintain productivity during breakdown situations.
By implementing these measures, A Ltd can mitigate the impact of machine breakdowns on labor costs and overall efficiency.