Advanced: Planning and operating variances POV Ltd uses a standard costing system to control and report upon the production of its single product.

An abstract from the original standard cost card of the product is as follows:

For Period 3, 2500 units were budgeted to be produced and sold but the actual production and sales were 2850 units.

The following information was also available:
(i) At the commencement of Period 3 the normal material became unobtainable and it was necessary to use an alternative. Unfortunately, 0.5 kg per unit extra was required and it was thought that the material would be more diffi¬ cult to work with. The price of the alternative was expected to be £16.50 per kg. In the event, actual usage was 12 450 kgs at £18 per kg.
(ii) Weather conditions unexpectedly improved for the period with the result that a £0.50 per hour bad weather bonus, which had been allowed for in the original standard, did not have to be paid. Because of the difficulties expected with the alternative material, management agreed to pay the workers £8 per hour for Period 3 only. During the period 18 800 hours were paid for.
After using conventional variances for some time, POV Ltd is contemplating extending its system to include planning and operational variances.
You are required:

(a) to prepare a statement reconciling budgeted contribution for the period with actual contri¬ bution, using conventional material and labour variances; (4 marks)

(b) to prepare a similar reconciliation statement using planning and operational variances;
(14 marks)

(c) to explain the meaning of the variances shown in statement (b). (4 marks)
(Total 22 marks) CIMA Stage 3 Management Accounting Techniques

Transcribed Image Text:

Selling price per unit less: 4 kgs materials @ 20 per kg 6 hours labour @ 7 per hour Contribution per unit () () 200 42 18 80 122 78