Management Accounting 341 University of the Western Cape

MANAGEMENT ACCOUNTING AND COSTING 341

(MAC 341)

221
MODULE 8
Standard Costing

READING REFERENCES:
Fundamentals of Cost and Management Accounting Chapter 14

PLAN: Theory
SC 1 &2

OBJECTIVES:

At the end of this module you should be able to:

- Explain what standard costing is and when it is applicable;

- Discuss the advantages/disadvantages of standard costing;
- Explain how are standards set;
- Calculate material, labour and overhead cost variances;
- Calculate actual profit when using a standard costing system;
- Handle a change in raw material inventories;
- Handle a change in finished goods inventories;
- Identify the causes of material, labour and overhead variances;
- Distinguish between standard variable costing and standard absorption costing;
- Record standard costs and variances in T-account format;
- Understand the IAS2 implications.

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Module 8: Standard Costing
 i. OVERVIEW

Standard costing is a system developed to assist management in accounting for transactions, and
to control costs in an entity.

A standard costing system enables the variances between actual and budgeted figures to be
calculated and analysed in detail, thus enabling costs to be controlled more effectively. Standard
costs are predetermined target costs per unit that should be incurred under efficient operating
conditions.

Terminology:

AP: Actual unit price

SQf: Given the actual number of units produced how much total quantity should have been used,
based on the standard per unit?
AQ: The Actual quantity used
SQ: Standard Quantity: What is the original budgeted or expected quantity?
SP: Standard price: What is the budgeted or expected price?

Standard cost: The expected cost that a company determines at the beginning of the financial
period for prices paid and the amounts used. SQ x SP

e.g. The local cinema estimates to sell 1000 boxes of popcorn the standard cost of producing one
box of popcorn in January 2026 is:

Quantity Total Cost 1000 boxes Standard Cost per

box
Boxes 1000 boxes R1 500 R 1.50
Popcorn 30 packets of kernels R450 R 0.45
Overhead Fixed monthly R5 000 R 5.00
R6 950 R 6.95

Actual cost: The cost that a company incurs at the end of the financial period for prices paid and
the amounts used.

e.g. The local cinema sold 1100 boxes of popcorn and used the following amount of resources and
incurred the following costs for January 2026:

Quantity Total Cost

Boxes 1100 boxes R1 760
Popcorn 32 packets of kernels R480
Overhead Fixed monthly R5 100
R7 340

Standard cost variance: The difference between the standard (budgeted) cost and the actual cost.

e.g. continued…

Standard Actual Total variance

Boxes R1,500.00 R1,760.00 R260.00 UF
Popcorn R 450.00 R 480.00 R30.00UF
Overhead R5,000.00 R5,100.00 R100.00 UF
Module 8: Standard Costing 2
Standard cost variance: The difference between the standard (Flex budgeted) cost and the actual
cost.

Flex budget Actual Total variance

Boxes R1,650.00 W1 R1,760.00 R110.00 UF
Popcorn R 495.00 W2 R 480.00 R15.00 F
Overhead R5,500.00 W3 R5,100.00 R400.00 F

W1: R1.50 * 1100

W2: 30/1000 * 1100 *0.45
W3: R5*1100

Two key differences between standard costing and IFRS:

- Inventory is carried at standard cost

- Variances are recognised in full in the period the behaviour occurs

Module 8: Standard Costing 3

Management Accounting 341 University of the Western Cape
ii. TABLE METHOD

You are encouraged to use the table method outlined below to calculate standard costing variances. It is very important that you show ALL your
calculations for each variance so that your variance calculations can be marked through should you make a mistake somewhere.

Basic table:

Quantity Price
Original Budget Flexed Budget AQI@SP Actual Cost
Variance Variance
SQ x SP SQf x SP AQ x SP AQ x AP
Original - Flexed SQ x SP

Direct material

Material 1
Material 2

Direct labour

Labour type 1
Labour type 2
Variable overheads
VOH 1
VOH 2
Fixed
Flexed Budget
manufacturing Original Budget Actual Cost
overheads

* - per unit of INPUT i.e. kg’s, litres, hours etc.

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Module 8: Standard Costing
Management Accounting 341 University of the Western Cape
Where:

P – Price (or rate/tariff)

Q – Quantity
S – Standard
A – Actual
var – Variance
Aup – Actual units produced (not sold!!)
SQ/u – Standard quantity per unit
SP/kg* - Standard price per kg*

iii. ISSUES TO BE AWARE OF

1. Flexing
a. (1) FB = OB x Au/Bu; or (2) SC/u x Au
b. Revenue & Sales Exp Au SOLD Beware  FG!!
Production Costs Au PRODUCED
c. FMOH:
i. Absorbtion Cost = Flex
Var Cost = Don’t Flex
d. Fixed selling Exp: Don’t Flex

2. Materials variances
a. Price – AQ purchased Beware  RM!!
b. Usage – AQ used

3. Labour variances

4. VOH
a. Basis: units, labour hrs, machine hrs, activity No efficiency var
possible!

5. FMOH
a. Basis: units, labour hrs, machine hrs, activity Does not change Vol Var!
b. Volume variance = under/over absorption as a result of absorption costing
c. Volume variance = Capacity + Efficiency var

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
A. CALCULATION AND ANALYSIS OF VARIANCES

Lecture example

You are the management accountant at Auto Seats SA (Pty) Ltd (ASSA), a manufacturer of
automotive seats. ASSA uses a FIFO standard absorption costing system for cost control and
performance evaluation as well as to value its inventory for GAAP purposes. Monthly detailed
variance reports are prepared for management to allow for “management by exception”. Standards
are set at “tough but attainable” levels following a participative budgetary process. Standards are
generally reassessed every six months. Management use the variance reports with care to ensure
that the appropriate managers are held responsible for the variances. Management consider all
variances to be material.

Below is data relating to the month of February 2026.

Budget Actual
Seat sales 550 seats 490 seats
Chair production 600 seats 500 seats
Selling price R600 R640
Fixed admin overhead R12 400 R12 000

Standard cost card for one seat: R

Metal tubing 6m @ R6 36
Leather 2m2 @ R14 28
Foam – Type A 1 kg @ R12 12
Foam – Type B 2 kg @ R6 12
Direct labour – Skill level 1 2 hrs @ R40 80
Direct labour – Skill level 2 1 hr @ R80 80
Variable manufacturing overhead 2 hrs @ R62 124
Fixed overhead 2 hrs @ R80 160
Total cost per seat 532

There was no raw material inventory on hand at the beginning of the month. There was no opening
or closing WIP for the month. There were 50 completed seats on hand at the beginning of
February. Variable and fixed manufacturing overheads are allocated based on direct machine
hours. The denominator level of activity is 1 200 machine hours.

Actual costs for February were as follows:

 Metal tubing purchases were 3 600 metres @ R5.00 per metre. There was no opening raw
material inventory. The closing raw material inventory was 100 metres.
 R24 000 was spent on purchasing 1 500 square metres of leather. All the leather was used
in production.
 400 kg of Type A foam was purchased at R10 per kg. 600 kg of Type B foam was
purchased at R8 per kg. All of the foam was used in production.
 Skill level 1 workers worked 1 200 hrs at a rate of R44, while skill level 2 workers worked
625 hrs at a rate of R70 per hour.
 Variable overhead costs amounted to R70 000. The actual variable overhead rate was R56
per machine hour.
 The actual fixed overhead rate was R84 per machine hour.
 The leather price and usage variances for February were R3 000 unfavourable and R7 000
unfavourable, respectively.

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
REQUIRED

1. Basic production variances

Calculate the following variances:

1.1 Metal tubing price variance

1.2 Metal tubing usage variance
1.3 Foam price variance
1.4 Foam usage variance
1.5 Direct labour rate variance
1.6 Direct labour efficiency variance
1.7 Variable overhead expenditure variance
1.8 Variable overhead efficiency variance
1.9 Fixed overhead expenditure variance
1.10 Fixed overhead volume variance

2. Calculation of Actual profit

Calculate actual net income for February (show ALL workings).

3. T-Accounts

Show all ledger accounts (before closing variance accounts at month end).

4. Variable v Absorption Costing

Tabulate the differences between a standard variable costing system and a standard
absorption costing system.

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Management Accounting 341 December 30, 1899
1. Basic production variances

Concept: Isolate the variances that relate to the difference in the quantity of inputs that was used
and the price that was paid for that input.

FB (SPxSQ) Q var AQxSP P var Actual

(AQ@SP) (AQI@SP) (APxAQ)
Metal tubing AQ x SP

= R21 600 R3 600F = R18 000

SP x SQ AQ x SP

= R18 000 R3 000U = R21 000

Foam Type A
=R6 000 R1 200F =R4 800 R800F =R4 000

Foam Type B
=R6 000 R2 400F =R3 600 R1 200U =R4 800

=R3 600 F =R400U

Direct Labour Level 1

=40 000 8 000U =48 000 4 800U =52 800

Direct Labour Level 2

= 40 000 10 000U =50 000 6 250F = 43 750

=18 000U =1 450F

Variable overhead
variances
=62 000 15 500U =77 500 7 500F =70 000

Fixed overhead SP x SQ Static AP x AQ

variances budget
=80 000 16 000U =96 000 9 000U =105 000

2.

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Module 8: Standard Costing
 Management Accounting 341 December 30, 1899
2. Calculation of Actual Profit

Calculate actual net income for February (show ALL workings)

Actual sales revenue 313 600

Less COS: 316 430
Metal tubing purchased 18 000
Less: Metal tubing c/s @ std (600)
Leather 24 000
Foam 8 800
Labour 96 550
Variable overhead 70 000
Fixed overhead 105 000
Less: closing fin gd @ std (31 920)
Add: opening fin gd @ std 26 600
Actual GP/(loss) (2 830)
Less fixed admin OH 12 000
Actual net profit ………………. (14 830)

3. T-Accounts

Bank
Sales 313 600 Metal tubing inventory 18 000
Leather inventory 24 000
Foam type A inventory 2 000
Foam type B inventory/P var 4 800
WIP/labour level 1 rate & effic var 52 800
WIP/labour level 2 effic var 43 750
WIP/var OH effic var 70 000
WIP/fixed OH budget & volume var 105 000
Bal c/d 8 750
322 350 322 350
Bal b/d 8 750

Metal tubing inventory

o/b 0
Bank 21 600 WIP/usage var 21 000
Bal c/d 600
21 600 21 600
Bal b/d 600

Leather inventory
o/b 0
Bank 21 000 WIP/usage var 21 000
Bal c/d 0
21 000 21 000
Bal b/d 0

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Management Accounting 341 December 30, 1899
Foam Type A inventory
Bank 4 800 WIP 4 800
Bal c/d 0
4 800 4 800
Bal b/d 0

Foam Type B inventory

Bank 3 600 WIP 3 600
Bal c/d 0
3 600 3 600
Bal b/d 0

WIP
Metal tubing inventory 18 000 Finished goods 266 000
Leather inventory 14 000
Foam Type A inv/usage var 6 000
Foam Type B inv/usage var 6 000
Bank (lab level 1) 40 000
Bank/labour level 2 rate var 40 000
Bank/ var OH exp var 62 000
Bank (FOH) 80 000 Bal c/d 0
266 000 266 000
Bal b/d 0

Finished goods
o/b 26 600 COS 260 680
(50x532)
WIP 266 000
Bal c/d 31 920
292 600 292 600
Bal b/d 31 920
(60x532)

Metal tubing p var

Metal Tubing inventory 3 600

Metal Tubing usage var

Metal tubing inventory 3 000

Leather p var
Bank 3 000

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899

Leather usage var

Leather inventory 7 000

Foam type A p var

Foam type A 800
inventory

Foam type A usage var

WIP 1 200

Foam Type B p var

Bank 1 200

Foam Type B usage var

WIP 2 400

Labour level 1 rate var

Bank 4 800

Labour level 1 efficiency var

Bank 8 000

Labour level 2 rate var

WIP 6 250

Labour level 2 efficiency variance

Bank 10 000

Var OH expenditure var

WIP 7 500

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899

Var OH efficiency var

Bank 15 500

Fixed OH budget var

bank 9 000

Fixed OH volume var

bank 16 000

Solution to lecture example 4

Standard variable costing Standard absorption costing

Fixed manufacturing overheads are not Fixed manufacturing overheads are allocated
allocated to products. to products.
Sales margin variances are reported in terms Sales margin variances are reported in terms
of contribution margins (selling price less of gross profit margins (selling price less full
variable manufacturing cost). manufacturing cost).
There is no fixed overhead volume variance. There is a fixed overhead volume variance.
Variable costing is not allowable by GAAP. Standard absorption costing is allowable by
GAAP as long as standard costs approximate
actual.

Fixed overhead SP x SQ Static Spending AP x AQ

variances – Absorption budget Variance
costing
=80 000 16 000U =96 000 9 000U =105 000
Budget Actual
Fixed Overhead 96 000 9 000U 105 000
Variance – Variable
costing

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
INVENTORY VALUATION IN TERMS OF IAS 2

Standard costing systems are not used with the intention of valuing inventory but rather for control
purposes. However, for financial reporting purposes, cost measurement through the use of a
standard costing system is allowed provided that certain adjustments are made.

IAS 2 – Inventory
Lower of:

Cost Net Realisable Value

IAS 2:21 – “Techniques for the measurement of the cost of inventories, such as the standard cost
method may be used for convenience if the results approximate cost.”
(Assumed to not be an issue)

Thus any variances that are not material can just be written off to COS. However, if a variance is
material it must be prorated (i.e. allocated in proportion to inventory and COS) so that inventory is
restated to actual cost.

Two cases where we don’t prorate:

1. Abnormal wastage – para 16(a)

2. Under application – para 13

1. Abnormal wastage
When standards are set, a certain amount of wastage is included in the standard as it is
considered to be part and parcel with the production process. In other words it is “normal” wastage.
Thus, any unfavourable quantity variance for materials or labour would be considered abnormal.

Price variances are never considered abnormal. Thus, price variances should all be prorated if
material.

2. Under application
According to IAS 2:13 overhead allocation should be based on normal capacity.

Normal Capacity: the production expected to be achieved on average over a

number of periods or seasons under normal circumstances, taking into account the
loss of capacity resulting from planned maintenance. (IAS 2:13)

In periods where actual production levels are below normal capacity a portion of overheads will
remain unapplied at the end of the period. These unapplied overheads are recognised as an
expense in the period in which they are incurred (i.e. written off to cost of sales) and not prorated.

If actual production < normal production - under applied

If actual production > normal production - over applied

In periods of high production volumes the overheads applied should not exceed the total overhead
incurred as this would result in inventory being stated above cost. Thus, if actual production is
greater than normal production, overheads should be allocated based on actual production
volume.

Note: variances may be prorated etc. at end of period but at beginning of new period entries are
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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
reversed so that inventory carried at standard cost.

Discussion and analysis of variances

 Identifying reasons for the variances

- Take note of the relative size of the variances

 Inter-relationship between cost variances, e.g. cheaper labour rate (favourable rate variance)
vs. less productive work (unfavourable efficiency variance)

- Also discuss the net effect

- If it is a permanent change -> adjust standards

 Inter-relationship between cost and sales variance, e.g. cheaper materials used may cause a
drop in sales prices or volumes.

- Also consider how the quality of the products will affect the company’s reputation
- Effect on market share and profit etc.

 Variance beyond the company’s control (due to general market conditions): adjust standards.

 Watch out for the base on which overheads are allocated

 Take all other information into consideration - (marks will be awarded for good quality
arguments as well as the extent to which it is justified, explained and logical.)

You may be asked to give advice on what action needs to be taken in response to the reported
variances.

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
FRAMEWORK FOR PROVIDING REASONS FOR VARIANCES

MATERIAL Price Variance: FAVOURABLE

Positive reason
 Bought in bulk
 Good management/ negotiation

Negative reason
 Poor Quality

Price Variance: UNFAVOURABLE

Positive reason
 Better Quality materials

Negative reason:
 Just in time/ poor planning

MATERIAL Usage Variance: FAVOURABLE

Positive reason:
 Staff are using material in an efficient manner

Negative reason
 Standard usage may be too high

MATERIAL Usage Variance: UNFAVOURABLE

Positive reason:
 Product quality is improved

Negative reason:
 Theft
 Wastage
 Rework

LABOUR Rate Variance: FAVOURABLE

Positive reason:
 Staff are working in an efficient manner using less hours on the number of products

Negative reason:
 Staff are paid less than was agreed or less than legislated
 Penalties or legal proceedings
 Disgruntled employees, unhappy employees

LABOUR Rate Variance: UNFAVOURABLE

Positive reason
 More skilled labourers than budgeted

Negative reason:
 Overtime

LABOUR efficiency Variance: FAVOURABLE

Positive reason:
 More skilled therefore more efficient

Negative reason:
Expectation is too low, or budget is too easy

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Management Accounting 341 December 30, 1899
LABOUR efficiency Variance: UNFAVOURABLE
Positive reason:
 Special order might have required additional hours but will bring future revenue

Negative reason:
 Less skilled, lazy therefore use more hours

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
SC01 (35 MARKS: 70 MINUTES)

H&S Engineering (Pty) Ltd is a small engineering firm who produces precision components for the
motor vehicle industry. Mr. Hugo, the Financial Manager took ill during May 2017, just before the
scheduled monthly board meeting. As a number of the directors travel long distances to be at this
meeting, it cannot be postponed. You have been asked to prepare the monthly board report that
he was unable to complete.

The company uses an absorption costing system. Both variable and fixed manufacturing
overheads are applied to production using direct labour hours.

The Purchasing Manager was able to tell you that the standard cost per kilogram of material was
R10.80 and that each unit should use a standard 8 kilograms. He very excitedly tells you that he
managed to secure the purchase of raw materials at 50cents less than the standard price per kg
during the month of May.

The Production Manager confirmed that 9 000 units were produced during May and that there was
neither opening nor closing stock of finished goods or work in progress.

The Stores Manager let you know that stock of raw materials increased by 4 000 kg from the
beginning to the end of the month.

A review of the budget reveals the following:

Budgeted figures for May

Budgeted production 10 000 units

Budgeted direct labour hours 12 500 hours

Budgeted direct labour cost R225 000

Budgeted variable overheads R75 000

Budgeted fixed overheads R170 000

Mr. Hugo had already calculated the following before falling ill.

Direct materials price variance R39 000 Favorable

Direct labour costs incurred R205 200

Direct labour efficiency variance R9 000 Adverse

Variable manufacturing overhead spending variance R5 200 Adverse

Total fixed overhead variance R15 000 Adverse

Required:

1. Calculate the total number of kilograms of direct materials purchased during 3

May.
2. How many more kilograms of direct materials were used in production than the
standard allowed? 2
3. Calculate the direct materials usage variance. 2
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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
4. How many actual hours of direct labour were used during May? 4
5. Calculate the variable manufacturing overhead variance. 3
6. Calculate the fixed manufacturing overhead volume variance. 2
7. Is the Purchasing Manager justified in being pleased with the favorable price
variance? Speculate, by looking at the interactions between the variance, on the
possible consequences of the Purchasing Manager’s actions for the company. 4
8. Calculate the actual wage rate per hour and give possible reasons for this
saving and discuss the possible negative consequences thereof. 6
9. What is the total manufacturing cost for H&S for the month of May under
standard costing? How does this differ rom the Cost of Goods Manufactured?
(Calculate both costs and explain why they differ.) 7
Efficient communication – Q7. 1
Neatness overall 1

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
H & S Engineering (MAC234ReExam2017 Question3)

Mark
Given Info 1/2 Mark

Standard
10000 units per unit in total
Direct material 10.80 8.00 864,000
Direct labour 18.00 1.25 225,000
Variable overheads 6.00 1.25 75,000
Fixed overheads 13.60 17.00 170,000

Actual 78,000
9000 units per unit in total
Direct material
Direct labour 205,200
Variable overheads
Fixed overheads

1.
No of kg of direct material purchased.
Direct material price variance
unknown x (std-actual) = R 39 000
unknown x (10,80-10,30) = 39 000
x*0,5 = 39000
x = 78 000 kg
3
2.
How many less kilograms of direct materials were used in prod than std?

Std 72,000 kg

Actual 78 000kg - 4 000kg 74,000 kg

Increase of 2,000 kg 2

3.
Direct materials usage variance
(Std quantity for actual prod- actual quantity used) x std price
(72 000-74 000) x 10,80
-21,600 Adverse Only give mark if state adverse 2

4.
Actual Hrs?
Std rate 18 9,000
Effi ciency variance
(Std quantity for actual prod - actual hrs)x std rate 19
Module 8: Standard Costing
(11 250 - unknown) x 18 = -9 000
x = 11750 4
Management Accounting 341 December 30, 1899
5.
R 6.00 variable o/h rate
Variable Manufacturing overhead effi ciency variance
(Std quantity of input hrs for std prod - actual input hrs) x variable O/H rate
(11 250 - 11 750) x 6
-3,000 Adverse 3

6.
Fixed manufacturing volume variance
(Actual production - budgeted production) x standard fixed overhead rate
(9 000-10 000) x 17 or (9000*1,25-10000*1,25)*13,6
17,000 Adverse 17,000 Adverse 2

7.

It is positive that he managed to purchase the material at a lower price, however the
unfavourable material usage variance indicates that there was significant material
wastage during the month. This may have been due to poor quality material. This
theory is born out by the unfavourable labour effi ciency variance. I would suggest an
investigation into the quality of the raw material purchased. If the quality is not a
problem and the unfavourable variance were caused by something unrelated and the
price is sustainable the standard should be updated.
max 4
8.
R 205 200 / 11 750 hours
R 17.46
The company may have paid workers less than they initially agreed to. Could result in
labour unrest.
The company may have used more unskilled labour than planned, this is possibly
indicated in the unfavourable labour effi ciency variance.
Workers may have resigned and the new workers may be paid less.
New workers or unskilled workers may take longer, indicated in unfavourable labour
effi ciency variance.
In addition new or unskilled workers may waste material, indicate in unfavourable
material usage variance.
max 6
9.
Total Manufacturing cost under standard costing
May
9000 units
Direct material 10.80 8.00 777,600
Direct labour 18.00 1.25 202,500
Variable overheads 6.00 1.25 67,500
Fixed overheads 13.60 153,000
1,200,600

Cost of goods manufactured

May
Direct material 762,200
Direct labour 205,200
Variable overheads (67500+5200) 72,700
Fixed overheads 168,000
(actual prod x std rate) - actual fixed o/h cost 1,208,100
153 000 - unknown = -15 000

The total manufacturing cost is the actual production at standard cost.

The cost of goods manufactured is the actual cost of goods manufactured. 7
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Module 8: Standard Costing 33
Effective communication Q7 1
Neatness 1
Management Accounting 341 December 30, 1899

SC02 (30 MARKS: 60

MINUTES)

Healthy Life is a company which manufactures Aloe Vera juice for sale to the public. It is a small
company which has started production in 2015. The aloe plants are grown in the Karoo area and
Mr. Henderson purchases his raw aloe juice from these farmers. He has consequentially
established his bottling plant nearby to his source of raw material. The area does have one severe
drawback, being a small town; it suffers from an erratic electricity supply. Mr. Henderson is
concerned that this is having a negative effect on the profitability of his business. The company
operates a variable costing system.
Aloe Vera juice is packaged in 500ml bottles.

The standard cost of producing one bottle of Aloe Vera juice is as follows:

Direct Material
510ml of Aloe Vera juice @ R12 per litre R6.12
1 Plastic bottle 55c

Direct Labour
3 minutes @ R80 per hour R4

Variable overheads are allocated at a rate of R20 per direct labour hour.
Fixed overheads for the year were budgeted at R1 000 000 based on annual production of
2 000 000 bottles.
Production and sales for May were budgeted at 180 000 bottles.
The juice was budgeted to sell at R12.50 per bottle.

Actual costs for May were as follows:

95 950 litres of Aloe Vera juice at a cost of R1 170 590.

200 000 plastic bottles were purchased at a cost of R102 000, 190 100 of them were used.
Workers worked a total of 11 083 hours and were paid R831 250.
Variable overhead cost totaled R232 750 and fixed overhead amounted to R98 000.
190 000 bottles of Aloe Vera were produced and sold during the month with a total revenue of
R2 356 000.

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Management Accounting 341 December 30, 1899

Required:
1. Calculate the actual profit for the month of May. 3

2. Calculate the budgeted profit for the month of May. 3

3. Compute the Aloe Vera raw juice price and usage variances. 4

4. Compute the plastic bottle price and usage variances. 2

5. Compute the labour rate and efficiency variances. 4

6. Comment on possible reasons for the favorable plastic bottle price variance. 3

7. Discuss which variances may be affected by the erratic electricity supply and 5
why. If this situation is expected to continue at this level into the future suggest
what corrective action could be taken.

8. Identify reasons why the standard quantity of Aloe juice per bottle may be set at 3
510ml when the bottle only contains 500ml.

Layout – Question 3-5. 1

Use of language and coherent explanation – Question 6-8. 1
Neatness overall 1

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
Healthy Life Question 3 MAC234 TT2 2017
Total Marks
1.
Standard Profit 180 000 bottles

Sales R 12.50 2,250,000

Aloe Vera Juice 510 12 R 6.12 1,101,600

Bottles R 0.55 99,000
Direct Labour R 4.00 720,000
Indirect Costs R 1.00 180,000
Fixed Costs 90,000 3

Profit R 0.83 59,400

2.
Actual Profit 190 000 bottles

Sales R 12.4000000 2,356,000

Aloe Vera Juice R 6.1610000 1,170,590

Bottles R 0.5102684 96,951
Direct Labour R 4.3750000 831,250
Indirect Costs R 1.2250000 232,750
Fixed Costs R 0.5157895 98,000 3

Loss -73,541
3.
Material - juice
Usage
(Std Quantity actual production - Actual quantity) x SP 11,400 F
(((510*190000)/1000)-95950)*12

Price
(SP-AP) x Quantity purchased -19,190 A
(12-12.2)*95950

4.
Material - bottles
Usage
(Std Quantity actual production - Actual quantity) x SP -55 A
(190000-190100)*0.55

Price
(SP-AP) x Quantity purchased 8,000 F
(0.55-0.51)*200000

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Module 8: Standard Costing
Management Accounting 341 December 30, 1899
5.
Labour
Effi ciency
(SH for actual prod - AH) x SR -126,640 A
(3/60*190000-11083)*80

Rate
(SR-AR) x AH 55,415 F
(80-75)*11083
Mark not given for variance if it is not stated Fav or Adv. 10
6.
The price of bottles may have come down, in which case the standard needs to be adjusted.
Mr Henderson may have managed to negotiate a bulk discount when he purchased 200 000 bottles.
A cheaper, poorer quality bottle may have been sourced.
A new supplier may have been found who charges less. Max 3

7.
All variances which are affected by actual direct labour hours are likely to be affected.
This is due to down time caused by the lack of electricity. Staff are likely to be idle, but
still have to be paid.
Labour effi ciency variance
Variable overhead effi ciency variance
The raw material (aloe juice) usage variance may be affected if units are spoiled when the
power cuts unexpectedly.
The company may want to invest in a generator, otherwise if this is not a viable solution
the standard must be adjusted to account for the expected idle time.
The company may consider moving its production plant to an area where the electricity
supply is more stable and rather transport the raw material.
Max 5
8.
This may be because the company has decided to set a standard which is challenging, but
attainable. It is expected that even under normal operating conditions the will be some
juice spilt or wasted if a machine breaks down.
Attaining a practical standard keeps employees on their toes without demanding miracles.
Max 3

27
Layout Q3-5 1
Effective communication Q6-8 1
Neatness 1
30

24
Module 8: Standard Costing