Question

Below is the information on the operation of Spice Sdn. Bhd. which manufactures a health product under the brand name SS:

Standard Cost Card                                        RM

            Direct material           0.8kg at RM12 per kg                            9.60

            Direct labour              3 hours at RM6 per hour                   18.00

            Variable overhead     4 hours at RM2.90 per hour              11.60

                                                                                                             39.20

For the month of July 2020, the company has estimated to manufacture and sell 4,875 units of SS at a standard selling price of RM40 per unit. The actual results for that month were as follows:

A total of 5,200 units of SS was sold for RM197,600.

Direct materials of 4,100 kg were bought with the cost of RM51,250. However, only 3,600 kgs were consumed for production.

Direct labor hours of 9,000 hours were used totaling RM55,800.

Based on the above information, you are required to:

1. Provide the formula and calculate each of the following variances. Then, determine whether each of them is Favourable (F) or Unfavourable (U):

1. direct material price variance;

(3)

2. direct material quantity variance;

(3)

3. direct labour rate variance; and

(3)

4. direct labour efficiency variance.

(3)

2. Based on your calculations in (a) above, explain your answers and provide ONE (1) reason each for your answers for (i) and (iii).

(8)

3. Discuss how the information from this variance analysis benefits Spice Sdn. Bhd.

Answer 1

1)

   Part-A         
1   Actual price per kg (51,250 / 4,100)   12.50     
   Standard price per kg.   12.00     
   Difference (12.50 - 12.00)   0.5     
   Kg's purchased   4,100     
   Price Variance (4,100 * $0.5)   2050 U     
             
2   Actual Kgs used.   3,600     
   Standard Kgs. (5,200 actual units * $ 0.8)   4,160     
   Difference (4,160 - 3,600)   560     
   Standard price/kg   12     
   Usage Variance (560 * $12)   6,720 F     
             
3   Actual rate/hour (55,800 / 9,000)   6.20     
   Standard rate/hour   6.00     
   Difference (6.20 - 6.00)   0.2     
   Actual hours used   9,000     
   Rate Variance (0.2 * 9,000)   1,800 F     
             
4   Actual hours used   9,000     
   Standard hours (5,200 * 3)   15,600     
   Difference (15,600 - 9,000)   6,600     
   Standard rate/hour   6     
   Efficiency Variance   39,600 F     

2) The direct material price variance is unfavorable because the calculations shows that more than estimated price per unit was paid by Spice Sdn. Bhd. The direct materials usage variance is favorable because the calculations shows that the standard quantity of materials was more than the actual quantity of materials used.

3) The above variance computations would help in guiding Spice Sdn. Bhd. to control the cost with a reduction in the wastage