CAT T7 Planning, Control and Performance Management

? Short Questions

1: A company has planned to produce 5,200 units of Product X next month and has allowed a total
standard time for this level of production of 325 hours. The actual output for the month was 5,616
units, which was actually achieved in 357 hours.
What was the efficiency ratio (to the nearest two places of decimals)?

Efficiency ratio Standard hours for AO/ Actual hours

(325/ 5,200 x 5,616)/ 357 x 100 = 98.32%

2: A company has calculated that its activity (volume) ratio is 99% and that its efficiency ratio is 110%.
What was the capacity ratio (to the nearest whole number)?

Capacity ratio Activity ratio/ efficiency ratio

(0.99/ 1.10) x 100 = 90%

3: The activity (volume) ratio for a given month was 110% and the efficiency ratio was 99%.
What was the capacity ratio (to the nearest whole number) for the same month?

Capacity ratio Activity ratio/ efficiency ratio

(0.99/ 1.10) x 100 = 90%

5 Sales Variances

Example:
You are the accountant of company which sells three products. The sales budget for June was:
Product A B C
Budget sales (units) 300 200 150
Actual sales (units) 360 230 100
Standard cost per unit $28 $37 $81
Standard variable cost per unit $16 $22 $66
Standard selling price per unit $40 $60 $100
Actual selling price per unit $38 $65 $120

Calculate the following variances:

(i) Sales variances (ii) Sales volume variances (iii) Sales price variances

(i) Sales variances

A B C
ASR (360 x 38) 13,680 (230 x 65) 14,950 (100 x 120) 12,000
~ BSR (300 x 40) 12,000 (200 x 60) 12,000 (150 x 100) 15,000
1,680F 2,950F 3,000A

(ii) Sales volume variances

A B C
AO x SP (360 x 40) 14,400 (230 x 60) 13,800 (100 x 100) 10,000
~ BO x SP (300 x 40) 12,000 (200 x 60) 12,000 (150 x 100) 15,000
2,400F 1,800F 5,000A

(iii Sales price variances

A B C
ASP x AO (360 x 38) 13,680 (230 x 65) 14,950 (100 x 120) 12,000
~ SSP x AO (360 x 40) 14,400 (230 x 60) 13,800 (100 x 100) 10,000

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720A 1,150F 2,000F

Sales margin volume variances

A B C
AO x SM (360 x 12) 4,320 (230 x 23) 5,290 (100 x 19) 1,900
~ BO x SM (300 x 12) 3,600 (200 x 23) 4,600 (150 x 19) 2,850
720F 690F 950A

Sales contribution volume variances

A B C
AO x SC (360 x 24) 8,640 (230 x 38) 8,740 (100 x 34) 3,400
~ BO x SC (300 x 24) 7,200 (200 x 38) 7,600 (150 x 34) 5,100
1,440F 1,140F 1,700A

Illustration 8:
A company is reviewing actual performance to budget to see where there are differences. The following
standard information is relevant:

$ per unit
Selling price 50
Prime Costs 20
Variable production overheads 11
Fixed production overheads 5
Fixed selling costs 1

Budgeted sales units were 3,000. Actual units sold in the period were 3,500 at a price of $46 per unit.

What was the sales volume variance and sales price variance using marginal costing?

Sales price variances

ASP x AO 46 x 3,500 = 161,000
~ SSP x AO ~ 50 x 3,500 = 175,000
= 14,000 (A)

Sales contribution volume variances

AO x SC 3,500 x 19 = 66,500
~ BO x SC ~ 3,000 x 19 = 57,000
= 9,500 (F)

Sales variances
AO x SC 3,500 x 15 = 52,500
~ BO x SC ~ 3,000 x 19 = 57,000
= 4,500 (A)

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Illustration 11:
(a) Calculate price and usage variances for each of the direct materials A and B.

(i) Direct materials usage variance

Material A Material B
AQ x SP 4,800 x 3.25 15,600 1,800 x 4.00 7,200
~ SQ x AO x SP ~ 10 x 400 x 3.25 13,000 ~ 5 x 400 x 4.00 8,000
2,600A 800F

(ii) Direct materials price variance (purchases)

Material A Material B
AP x AQ 158,750 105,000
~ SP x AQ ~ 3.25 x 50,000 162,500 ~ 4.00 x 25,000 100,000
3,750F 5,000A

(b) Calculate rate and efficiency variances for the direct labour employed by each of
Departments 1 and 2.

(i) Direct labour rate variance

Dept 1 Dept 2
AR x AHr 11,800 13,250
~ SR x AHr ~ 4 x 3,000 12,000 5 x 2,400 12,000
200F 1,250A

(ii) Direct labour efficiency variance

Dept 1 Dept 2
AHr x SR 12,000 12,000
~ SHr x AO x SR ~ (8 x 400 x 4 12,800 (5 x 400 x 5 10,000
800F 2,000A

(d) Calculate for Department 1 and Department 2:

(i) The production volume ratio

(ii) The efficiency ratio

Department 1 Department 2
(i) Production volume ratio
Standard hour for AO 8 x 400 5 x 400
x 100 x 100
Budgeted hour 3,400 2,600
= 94.12% = 76.92%

Department 1 Department 2
(ii) Efficiency ratio
Standard hour for AO 8 x 400 5 x 400
x 100 x 100
Actual hour 3,000 2,400
= 106.67% = 83.33%

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? Additional Questions (page 137)

Q2:
(a) Calculate the standard cost of a single metal container.
Material A (6 x 5.00) 30.00
Labour (2 x 4.50) 9.00
Variable overheads (2 x 7.50) 15.00
Fixed overheads (2 x 12.00) 24.00
78.00

(b) Calculate the following cost variances for May 2000;

(i) Material price and usage;
(ii) Labour rate and efficiency;
(iii) Variable overhead expenditure (or rate) and efficiency;
(iv) Fixed overhead expenditure and volume.

Direct materials price variance

AP x AQ = 18,290
~ SP x AQ ~ 5 x 3,550 = 17,750
= 540 (A)

Direct materials usage variance

AQ x SP 3,550 x 5 = 17,750
~ SQ x AO x SP ~ 6 x 600 x 5 = 18,000
= 250 (F)

Direct labour rate variance

AR x AHr = 5,610
~ SR x AHr ~ 4.50 x 1,320 = 5,940
= 330 (F)

Direct labour efficiency variance

AHr x SR = 5,940
~ SHr x AO x SR ~ 2 x 600 x 4.50 = 5,400
= 540 (A)

Variable overhead expenditure variance

AVOH = 9,400
~ VOAR x Ahr ~ 7.50 x 1,320 = 9,900
= 500 (F)

Variable overhead efficiency variance

Ahr x VOAR = 9,900
~ Shr x AO x VOAR ~ 2 x 600 x 7.50 = 9,000
= 900 (A)

Fixed overhead expenditure variance

AFOH = 15,610
~ BFOH ~ = 15,000
= 610 (A)

Fixed overhead volume variance

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CAT T7 Planning, Control and Performance Management

Shr x AO x FOAR 2 x 600 x 12 = 14,400

~ Bhr x FOAR ~ 15,000/12 x 12 = 15,000
= 600 (F)

Q3:

(a) Calculate the total standard cost of

(i) a single Type X bottle
(ii) a single Type Y bottle

(i) a single Type X bottle

Material 20/ 1,000 x 82 1.64
Labour 0.05 x 4 0.20
Variable factory overhead 0.05 x 1 0.05
Fixed factory overhead 0.05 x 2 0.10
1.99

(i) a single Type Y bottle

Material 30/ 1,000 x 82 2.46
Labour 0.06 x 4 0.24
Variable factory overhead 0.06 x 1 0.06
Fixed factory overhead 0.06 x 2 0.12
2.88

(b) For the most recent production period calculate the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency (or utilisation) variance

Direct materials price variance

AP x AQ = 4,800
~ SP x AQ ~ 82 x 60 = 4,920
= 120 (F)

Direct materials usage variance

AQ x SP = 4,920.00
~ SQ x AO x SP ~ (0.02 x 1,110 + 0.03 x 1,200) 82 = 4,772.40
= 147.60 (A)

Direct labour rate variance

AR x AHr = 600
~ SR x AHr ~ 4 x 120 = 480
= 120 (A)

Direct labour efficiency variance

AHr x SR = 480
~ SHr x AO x SR ~ (0.05 x 1,110 + 0.06 x 1,200) 4 = 510
= 30 (F)

(c) For the most recent production period calculate the following variances:
(i) Total variable overhead variance
(ii) Total fixed overhead variance

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CAT T7 Planning, Control and Performance Management

Total variable overhead variance

AVOH 120.00
~ SVOH for AO ~ (0.05 x 1,110 + 0.06 x 1,200) = 127.50
7.50 (F)

Total fixed overhead variance

AFOH 250.00
~ SFOH for AO ~ (0.10 x 1,110 + 0.12 x 1,200) = 255.00
5.00 (F)

(d) Give two possible reasons for each of the 4 variances calculated in Part (b) above. You
should ensure that the reasons given relate to the fact that the variances calculated in Part
(b) were favourable or adverse.
(refer notes)

(e) Explain the difference between an ‘ideal standard’ and an ‘attainable standard’.
Ideal standard is a based on a budget prepared for a work condition without losses, wastages. The
standards set will be too difficult to be achieved.
Attainable standard is based on a budget prepared with allowance for unavoidable losses and
wastages. The standard set will be achievable, though would be a challenging task.
Ideal standard is to be used for developmental purpose. Ideal standard will be compared to current
standard to determine areas/ room for improvement for future standards.
Attainable standard is used for day-to-day operations. The attainable standard will be compared to the
actual results to determine areas/ room for improvement in terms of future actions/ standards.

Q4: B2 (CAT) J2001 Q3

Brackton Limited manufactures a single product. The following standards relate to the product:
Direct material 10 litres at $2·50 per litre
Direct labour grade A 2 hours at $4·50 per hour
Variable factory overhead $3·00 per direct labour hour
Fixed factory overhead $8·00 per direct labour hour

For the most recent accounting period the following information has been extracted from the accounting
records of the company:

Production 1,000 units

Direct material 9,500 litres were bought and used at a total cost of $24,700
Direct labour 1,900 hours were worked and paid for at a total cost of $9,400
Variable factory overhead incurred $5,870
Fixed factory overhead incurred $15,000

(a) Calculate the following variances:

(i) material price;
(ii) material usage;
(iii) labour rate;
(iv) labour efficiency;
(v) variable overhead expenditure or rate;
(vi) variable overhead efficiency;
(vii) total fixed overhead.

Direct materials price variance

AP x AQ = 24,700

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CAT T7 Planning, Control and Performance Management

~ SP x AQ ~ 2.50 x 9,500 = 23,750

= 950 (A)

Direct materials usage variance

AQ x SP = 23,750
~ SQ x AO x SP ~ 10 x 1,000 x 2.50 = 25,000
= 1,250 (F)

Direct labour rate variance

AR x AHr = 9,400
~ SR x AHr ~ 4.50 x 1,900 = 8,550
= 850 (A)

Direct labour efficiency variance

AHr x SR = 8,550
~ SHr x AO x SR ~ 2 x 1,000 x 4.50 = 9,000
= 450 (F)

Variable overhead expenditure variance

AVOH = 5,870
~ VOAR x Ahr ~ 3 x 1,900 = 5,700
= 170 (A)

Variable overhead efficiency variance

Ahr x VOAR = 5,700
~ Shr x AO x VOAR ~ 2 x 1,000 x 3 = 6,000
= 300 (F)

Total fixed overhead variance

AFOH 15,000
~ SFOH for AO ~ 2 x 8 x 1,000 = 16,000
1,000 (F)

(b) Briefly identify any relationship between the variances that may be revealed by:
(i) the material price and material usage variances calculated in your answer to part (a).
(ii) the labour rate and labour efficiency variances calculated in your answer to part (a).

(i) Material price variance = $950 (A), material usage variance = $1,250 (F)
Better quality materials were bought which resulted in adverse material price variance. Total
material wastage was less than expected when better quality materials were used.
Besides that, adverse material price variance could be due to a different grade of material
purchased. Change of material grade could have affected the quantities used.

(i) Labour rate variance = $850 (A), labour efficiency variance = $450 (F)
Well trained labour have been hired, and thus, higher wages paid. As they are well trained, the
total hours taken to complete the production would be lower.

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CAT T7 Planning, Control and Performance Management

Q5: [CAT (C2) J2001 Q4]

A firm of accountants uses the standard hours worked by professional staff on client business as the basis for
client charging, and for cost control. The standard hours for each client job are established in advance based
on the expected amount of time required for each task. Some of the hours worked by professional staff are
not on client business and are thus not chargeable. Target control ratios are:

Activity Efficiency Capacity

96·9% 102·0% 95·0%

The activity ratio measures the standard hours of work, by professional staff on client business, as a
proportion of the total hours worked by the professional staff. The efficiency ratio measures the relationship
between the standard and the actual professional staff hours spent on client business. The capacity ratio
measures the actual professional staff hours spent on client business as a proportion of their total hours
worked.

During a period, the actual hours worked by professional staff totalled 3,630 of which 3,471 hours were
spent on client business. The standard hours for the work totalled 3,502.

(a) Calculate appropriate control ratios for the period (each to one decimal place of a per cent).
Activity ratio
Standard hours of work = 3,502
x 100 x 100 = 96.47%
Actual hours worked 3,630

Efficiency ratio
Standard hours of work = 3,502
x 100 x 100 = 100.89%
Actual hours on client business 3,471

Q6:
Variable overhead expenditure variance
AVOH = 24,250
~ VOAR x AO ~ 17,500/ 60 x 75 = 21,875
= 2,375 (A)
Or
Variable overhead expenditure variance
AVOH = 24,250
~ VOAR x Ahr ~ 17,500/ 6,000 x 7,150 = 20,854
= 3,396 (A)

Variable overhead efficiency variance

Ahr x VOAR = 20,584
~ Shr x AO x VOAR ~ 100 x 75 x 17,500/ 6,000 = 21,875
= 1,021 (F)

Fixed overhead expenditure variance

AFOH = 67,750
~ BFOH ~ 100 x 60 x 12 = 72,000
= 4,250 (F)

Fixed overhead volume variance

Shr for AO x FOAR 100 x 75 x 12 = 90,000
~ Bhr x FOAR ~ = 72,000
= 18,000 (F)

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CAT T7 Planning, Control and Performance Management

Fixed overhead capacity variance

Ahr x FOAR 7,150 x 12 = 85,800
~ Bhr x FOAR ~ 6,000 x 12 = 72,000
= 13,800 (F)

Fixed overhead efficiency variance

Ahr x FOAR = 85,800
~ Shr x AO x FOAR ~ = 90,000
= 4,200 (F)

Production volume ratio Standard hours for AO/ Budgeted hours

7,500/ 6,000 x 100 = 125.00%
Efficiency ratio Standard hours for AO/ Actual hours
7,500/ 7,150 x 100 = 104.90%
Capacity ratio Actual hours/ Budgeted hours
7,150/ 6,000 x 100 = 191.17%

Q7:
Direct materials price variance
AP x AQ = 8,450
~ SP x AQ ~ 21 x 420 = 8,820
= (370)

Direct materials usage variance

AQ x SP = 8,820
~ SQ x AO x SP ~ 0.06 x 7,200 x 21 = 9,072
= (252)

Direct labour rate variance

AR x AHr = 35,280
~ SR x AHr ~ 4 x 9,100 = 36,400
= (1,120)

Direct labour efficiency variance

AHr x SR = 36,400
~ SHr x AO x SR ~ 1.30 x 7,200 x 4.00 = 37,440
= 1,040 (F)

Variable overhead expenditure variance

AVOH = 34,200
~ VOAR x Ahr ~ 3.50 x 9,100 = 31,850
= 2,350

Variable overhead efficiency variance

Ahr x VOAR = 31,850
~ Shr x AO x VOAR ~ 1.30 x 7,200 x 3.50 = 32,760
= (910)

Fixed overhead expenditure variance

AFOH = 28,500
~ BFOH ~ = 28,000
= 500 (A)

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CAT T7 Planning, Control and Performance Management

Q8:
Riki Ltd produces and sells one product only. The standard cost and price for one unit being as follows:
$
Direct material A 10 kg @ $12 per kg 120
Direct material B 6 kg @ $5 per kg 30
Direct wages 5 hours @ $8 per hour 40
Fixed production overhead 5 hours @ $12 per hour 60
Total standard cost 250
Standard gross profit 50
Standard selling price 300
The fixed production overhead included in the standard cost is based on an expected monthly output of 750
units. Riki Ltd uses an absorption costing system based on direct labour hours.

During April 20X0 the actual results were as follows:

Sales (700 units @ $320) 224,000

Direct materials A (7,500 kg) 91,500

Direct materials B (3,500 kg) 20,300
Direct wages (3,400 hours) 27,880
Fixed production overhead 37,000
(176,680)

Gross profit 47,320

Reconcile budgeted profit with actual profit for the period

Operating statement
Budgeted Profit (50 x 750) 37,500
Sales margin volume variance (700 – 750) 50 2,500 A
Standard Profit for AO 35,000
Adjustments:
Sales price variance (320 – 300) 700 14,000 F
Material price variance :A (91,500 – (12 x 7,500) 1,500 A
:B (20,300 – (5 x 3,500) 2,800 A
Material usage variance :A (7,500 – (10 x 700)) 12 6,000 A
:B (3,500 – (6 x 700)) 5 3,500 F
Labour rate variance (27,880 – 8 x 3,400) 680 A
Labour efficiency variance (3,400 – 5 x 700) 8 800 F
FOH expenditure variance (37,000 – 45,000) 8,000 F
FOH efficiency variance (3,400 – 5 x 700) 12 1,200 F
FOH capacity variance (3,400 – 3,750) 12 4,200 A
Net variances 12,320 F

Actual Profit 47,320

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Q9:
Operating statement
Budgeted Profit (1,660 x 40) 66,400
Sales margin volume variance (1,350 – 1,660) 40 12,400 A
Standard Profit for AO (1,350 x 40) 54,000
Adjustments:
Sales price variance 391,500 – 273 x 1,350 22,950 F
Material price variance 90,625 – 7 x 12,500 3,125 A
Material usage variance (12,500 – 10 x 1,350) 7 7,000 F
Labour rate variance 98,600 – 12 x 8,500 3,400 F
Labour efficiency variance (8,500 – 6.5 x 1,350) 12 3,300 F
VOH expenditure variance 90,000 – 65 x 1,350 2,250 A
FOH expenditure variance 28,000 – 20 x 1,660 5,200 F
FOH volume variance (1,350 – 1,660) 20 6,200 A
Net variances 30,275 F

Actual Profit 84,275

Q10:
Operating statement
Budgeted Profit (10,000 x 8) 80,000
Sales margin volume variance (9,500 – 10,000) 8 4,000 A
Standard Profit for AO (9,500 x 8) 76,000
Adjustments:
Sales price variance 588,500 – 60 x 9,500 18,500 F
Material price variance 120,000 – 3 x 37,000 9,000 A
Material usage variance (37,000 – 4 x 9,500) 3 3,000 F
Labour rate variance 200,000 – 4 x 49,000 4,000 A
Labour efficiency variance (49,000 – 5 x 9,500) 4 6,000 A
VOH expenditure variance 47,000 – 5 x 9,500 500 F
FOH expenditure variance 145,000 – 3 x 5 x 10,000 5,000 F
FOH efficiency variance (49,000 – 5 x 9,500) 3 4,500 A
FOH capacity variance (49,000 – 50,000) 3 3,000 A
Net variances 500 F

Actual Profit 76,500

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