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TASK 2

1

Abbot ltd makes a special electronic component which has the following standard cost per unit:

Per unit

Notes

Your additional calculations

Sales price

17

Direct Materials

3.5

3.5 per kg

Direct Labour

12

24 per hour

Demand was expected to be 3,000 units and fixed costs were expected to be 4,000 for the month of February.

Several months later the results for February were reviewed and the following actual revenue and costs revealed.

Notes

Sales Revenue

33,800

Direct Materials

14,040

3900 kg used

Direct Labour

13,000

650 hours used

Fixed costs

4,100

Profit

2,660

2,600 units were sold

Required:

You are to write a memo to your manager explaining the discrepancy between budgeted and actual profit for February.

Your memo should include:

a)Reconciliation of the budgeted profit to actual profit using variances (including sub variances). (table format)

b)An explanation of what each variance means.

c)At least two suggestions as to what may have caused each variance.

d)An indication of which manager is responsible for each variance.

e)Advice as to whether all variances should be investigated further (give reasoning)

STEP 1: FLEX THE BUDGET

Demand (units)

Budget

Flexed

Actual

(STEP 2)

Variances

Sales Revenue

*

Materials

Labour

Fixed costs

*

PROFIT

*

*STEP 3

The sales price, sales volume and fixed cost variances can be transferred directly to your reconciliation in STEP 6

STEP 4- CALCULATION OF SUB VARIANCES- MATRICES

Use the method that you feel most comfortable with i.e. formulae from your text book OR matrices.The formulae have been included on page 7 of this worksheet.

DIRECT MATERIALS SUBVARIANCES

DIRECT MATERIALS

FLEXED

ACTUAL

PER KG/M / ETC

a

b

VOLUME OF KG/ M /ETC

standard usage x actual no. units

c

d

Direct Materials Price Variance:(a vs b) x d =

Direct Materials Usage Variance:(c vs d) x a=

TOTAL MATERIALS VARIANCE (add the above together - agree with original table?):

DIRECT LABOUR SUBVARIANCES

DIRECT LABOUR

FLEXED

ACTUAL

PER HOUR

a

b

VOLUME OF HOURS

standard usage x actual no. unit

c

d

Labour Rate Variance:(a vs b) x d =

Labour Efficiency Variance:(c vs d) x a=

TOTAL LABOUR VARIANCE ( add the above together - agree with original table?):

STEP 5:Remember that when Sub variances added together should give you the same figure from your flexed table!

STEP 6 : RECONCILIATION

Reconcile the budgeted profit to the actual profit by adding the favourable variances to the budgeted profit and deducting the adverse variances.

Budgeted Profit

Actual Profit