Question 4: Standard costing

1. Identify any two instances when a manager should investigate cost variances.
2. Pink Ltd uses an integrated standard costing system. You are presented with the following information for December 2020.

Standard cost for Product 52
Direct material	7 kg at $11 per kg
Direct labour	18 hours at $20 per hour
Variable overhead	$8 per machine hour
Budgeted quantity of machine hours	20 hours per unit
Budgeted monthly fixed overhead	$1,600,000
(applied to products based on machine hours)
Budgeted production	20,000 units
Actual events
Units produced	21,500 units
Material transferred to production	152,500 kg
Material purchased	150,000 kg costing $1,590,000
Direct labour	397,750 hours costing $7,557,250
Actual variable overhead cost	$3,472,250
Actual fixed manufacturing overhead cost	$1,700,000
Actual machine hours recorded	408,500

Tasks

Calculate the following variances for December. Your answers should clearly indicate whether variances are favourable or unfavourable. Your answers should also include an explanation of a variance or possible causes of a variance where indicated.

1. Direct material quantity variance (your answer should also include two possible causes for this variance).
2. Direct labour efficiency variance (your answer should also include two possible causes for this variance).
3. Variable overhead efficiency variance (your answer should also include an explanation of this variance).
4. Fixed overhead volume variance (your answer should also include two possible causes of this variance).
5. Fixed overhead budget variance (your answer should also include two possible causes of this variance).

3. You are presented with the following information:

	Budget	Actual
Sales volume (units)	5,000	5,500
Sales revenue ($)	50,000	52,250
Variable cost ($)	25,000	27,500
Contribution margin ($)	25,000	24,750

Task

Calculate sales variances to better explain the difference between the budgeted and actual contribution margins.