Computation of labour and material variances and reconciliation statements Malton Ltd operates a standard marginal costing system. As the recently appointed management accountant to Malton’s Eastern division, you have responsibility for the preparation of that division’s monthly cost reports. The standard cost report uses variances to reconcile the actual marginal cost of production to its standard cost.

The Eastern division is managed by Richard Hill. The division only makes one product, the Beta. Budgeted Beta production for May was 8000 units, although actual production was 9500 units.

In order to prepare the standard cost report for May, you have asked a member of your staff to obtain standard and actual cost details for the month of May. This information is reproduced below:

Task 1

(a) Calculate the following:
(1) the material price variance;
(ii) the material usage variance;
(111) the labour rate variance;
(iv) the labour efficiency variance (sometimes called the utilization variance);

(b) Prepare a standard costing statement reconciling the actual marginal cost of production with the standard marginal cost of production.
After Richard Hill has received your standard costing statement, you visit him to discuss the variances and their implications. Richard, however, raises a number of queries with you. He makes the following points:

Task 2

(a) Calculate the amounts within the material price variance, the material usage variance and the labour rate variance which arise from producing the special order.

(b) (i) Estimate the revised standard price for materials based on the change in the material price index.
(ii) For the 8000 units of normal production, use your answer in

(b) (i) to estimate how much of the price variance calculated in Task 1 is caused by the general change in prices.

(c) Using your answers to parts

(a) and

(b) of this task, prepare a revised standard costing statement.
The revised statement should subdivide the variances prepared in Task | into those elements controllable by Richard Hill and those elements caused by factors outside his divisional control.

(d) Write a brief note to Richard Hill justifying your treatment of the elements you believe are outside his control and suggesting what action should be taken by the company.

Transcribed Image Text:

Unit standard cost Quantity Unit Cost per price Beta () Material 8 litres 20 160 Material 78 000 litres Labour 4 hours 6 24 Labour 39.000 hours 184 Actual details for May Quantity Total cost () 1 599 000 249 600 1 848 600