ADVANCED MANAGEMENT ACCOUNTING
ACC60804
TUTORIAL 10 (SOLUTIONS)
1. What are planning variances? Why are they separately identified?
Are variances which have arisen because of inaccurate planning or faulty standards. A
planning variance compares an original standard with a revised standard that should or
would have been used if planners had known in advance what was going to happen. This
planning variance is not controllable, but it does provide useful feedback information to
management on how successful they are in forecasting material prices, thus helping
managers to improve their future estimates of material prices.
2. Explain the operational variances for materials and labour.
For materials and labour, planning and operational variances can be calculated by
comparing original and revised budgets (planning) and revised budgets with actual results
(operational).
A material price planning variance is useful to provide feedback on just how skilled
managers are in estimating future prices.
The operational variance is more meaningful as it measures the purchasing department’s
efficiency given the market conditions that prevailed at that time. It ignores factors which
cannot be controlled by the purchasing department.
3. Calculate the material mix variance
(Actual quantity in standard mix proportions - actual quantity used) X standard price
Actual
quantity in Actual
Standard
standard quantity Variance Variance $
price $
mix used
proportions
Chemical A 1790.47a 2144 353.53 A 0.60 212.118 A
Chemical B 1074.29b 824 250.29 F 1.40 350.406 F
Chemical C 895.24 c
792 103.24 F 1.00 103.24 F
3760 241.528 F
a
(0.5/1.05) x 3760; b (0.3/1.05) x 3760; c (0.25/1.05) x 3760
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4. Calculate the following variances for August:
AR = $15.50
SR = $14
RR = $17.50
AH = 11,400h
SH = 0.5h x 22,000 = 11,000
(i) The labour rate planning variance
(SR – RR) x AH = (14 – 17.50) x 11,400 = 39,900 A
(ii) The labour rate operational variance
(AR – RR) x AH = (15.50 – 17.50) x 11,400 = 22,800 F
5. Required:
SR per batch = $6.00 SR per hour = $6/0.5 = $12
SH per batch = 0.5hours
Budgeted production = 24,000units
Actual production = 20,500units
AH = 12,000hours
AR total = $136,800 AR per hour = 136,800/12000 = $11.40
Production situation MH 20% reduction 0.5h x 20500 units x 1.2 = 12300hours
(a) Calculate the labour rate and total labour efficiency variances for November,
based on standard cost provided above. (4 marks)
Labour rate variance = (AR – SR) x AH = ($11.40 - $12) x 12000 = $7,200 F
Labour efficiency variance = (AH – SH) x SR = [12000 – (0.5x20500)] x 12 =
$21000 A
(b) Analyse the total labour rate and total labour efficiency variances into component
parts for planning and operational variances in as much detail as the information
allows.
Labour rate:
Labour rate planning variance
(SR – RR) x AH = ($12 – 11.40) x 12000 = $7200 F
Labour rate operational variance
(AR – RR) x AH = (11.40 – 11.40) x 12000 = 0
2
Labour efficiency:
Labour efficiency planning variance
(SH – RH) x SR = (12300 – 10250) x 12 = $24,600 A
Labour efficiency operational variance
(RH – AH) x SR = (12300 -12000) x 12 = $3600 F
(c) Assess the performance of the production manager for the month of November.
In order to assess the production manager’s performance fairly, only the
operational variances should be taken into account. This is because planning
variances reflect differences which arise because of factors which are outside the
control of the production manager.
The operational variance for the labor rate was $0, which means that the labor
force was paid exactly what was agreed upon at the end of October; their reduced
rate of $11.40 per hour. The manager clearly did not have to pay anyone for
overtime, for example, which would have been expected to push this rate up. The
rate reduction was secured by the company and was not within the control of the
production manager, so he cannot take credit for the favorable rate planning
variance of $7,200.
As regards labour efficiency, the planning variance is $24,600 adverse. This is
because the standard labour time per batch was not updated in November to
reflect the fact that it would take longer to produce the truffles. The manager cannot
be held responsible for this.
The operational variance, on the other hand, is once again something which the
manager does have control of and should be held accountable for. In November,
it is $3,600 favourable, which reflects positively on him. When the recipe is
charged, as it has been in November, the chocolates usually take 20% longer to
make in the first month whilst the workers are getting used to handling the new
ingredient mix. Actual results show that the workers took less than the 20% extra
time that they were expected to take, hence the positive operational variance.
Overall, the manager has performed well, given the change in the recipe.
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6. For the month of November, compute the variances for both “Exit” and
“Entrance” signs, and in total:
a.) Material price planning variance
(Standard price – Revised price) x Actual quantity
“Exit” signs (RM15.75 - RM17.325#) x 39,950 meter = RM 62,921.25
(A/U)
“Entrance” (RM15.75 - RM17.325) x 80,000 meter = RM 126,000 (A/U)
signs
Total RM188,921.25 (A/U)
# RM15.75 per meter x 1.1 =RM17.325
b.) Material price operational variance
(Revised price – Actual price) x Actual quantity
“Exit” signs (RM17.325 - RM16) x 39,950 meter = RM 52,933.75 (F)
“Entrance” (RM17.325 - RM16) x 80,000 meter = RM 106,000 (F)
signs
Total RM158,933.75 (F)
c.) Material usage planning variance
Exit” signs = 15 centimeter x 1.15 = 17.25 centimeter
(Standard quantity for actual production – Revised quantity
for actual production) x Standard price
“Exit” signs [(235,000 x 15/100 m) -(235,000 x 17.25/100 m)] x
RM15.75= RM83,278.12 (A/U)
“Entrance” [(250,000 x 31/100 m) -(250,000 x 31/100 m)] x RM15.75 =
signs RM0
Total RM83,728.12 (A/U)
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d.) Material usage operational variance.
(Actual quantity – Revised quantity for actual production) x
Standard price
“Exit” signs [(39,950√) -(235,000√ x 17.25/100 m√= 40,537.50m)] x
RM15.75√= RM9,253.12√ F√
“Entrance” [(80,000√) - (250,000√ x 31/100 m√=77,500m)] x
signs RM15.75√= RM39,375√ A
Total RM30,121.88 (A)