Intermediate: Calculation of labour and material variances and production ratios A manufactunng company has recently introduced a system of standard costing and you, as the assistant management accountant, wish to demonstrate the value of the system to the management. The following data apply to period 4 which was a four-week financial period.

It had been decided to extract material price variance at the time of receipt. 400 finished goods units were produced in the period.
You are required

(a) to calculate price and usage variances for each of the direct materials A and B; (4 marks)

(b) to calculate rate and efficiency variances for the direct labour employed by each of Department 1 and 2: (4 marks)

(c) to suggest one possible reason for each of the variances shown in your answers to

(a) and

(b) above without stating the same reason more than once; (8 marks)

(d) to calculate for Department 1 and for Department 2 (i) the production volume ratio, (ii) the efficiency ratio; (4 marks)

(e) to appraise critically the decision to calculate and extract material price variances at the time of receipt

Transcribed Image Text:

Direct materials Purchases: Material A 50 000 kilograms for 158 750 Material B 25 000 kilograms for 105 000 Used: Material A 4800 kilograms Material B 1800 kilograms Direct labour Department 1 Department 2 3000 2400 Actual hours Wages paid worked () 11800 13250 3400 hours Budgeted normal capacity expressed in direct labour hours Department 1 Department 2 2600 hours Other information Standard cost for 1 unit of finished product Quantity Price () () Direct material A 10kg 3.25 32.50 Direct material B 5kg 4.00 20.00 Direct wages Dept 1 8 hours 4.00 32.00 Direct wages Dept 2 5 hours 5.00 25.00 109.50