PEV help please

noodles

Grimley Ltd has the following budgeted and actual costs and direct production data for the month of august.
budget Actual
prod units 20000
dir mat 40000kg £300000 37000 kg 278000
direct lab 10000 hrs £60000 9800 hrs 58600
total cost £360000 336600

I have been taught to learn AQSP-AQAP for direct material variance which I understand but
SQSP-AQSP for the direct usage variance gives me
40000*£7.50 - £37000*£7.50 the answer in the book gives me
2*19000 *£7.50 - £37000*£7.50

why would this be, why would I do 2*19000 and not as per my formula??

SandyHood

A quick question as a first reply

Was the budgeted production 20,000 and the actual production 19,000 units?

crispy

Hello,

It is because your actual production is probably 19,000 units

Kgs per unit (40,000/ 20,000) = 2kgs
Cost per Kg (300,000 / 40,000) = £ 7.50

Material Usage Variance:

Standard: 19,000 Units @ 2kgs = 38,000 Kgs * £ 7.50 = £ 285,000
Actual:....................................37,000 Kgs * £ 7.50 = £ 277,500
Variance:................................................................£ 7,500 (F)

noodles

SandyHood wrote: »

A quick question as a first reply

Was the budgeted production 20,000 and the actual production 19,000 units?

yes budgeted was 20000 actual was 19000 units.
It was all laid out nicely in colums and then when you post it the colums all change!!

noodles

crispy wrote: »

Hello,

It is because your actual production is probably 19,000 units

Kgs per unit (40,000/ 20,000) = 2kgs
Cost per Kg (300,000 / 40,000) = £ 7.50

Material Usage Variance:

Standard: 19,000 Units @ 2kgs = 38,000 Kgs * £ 7.50 = £ 285,000
Actual:....................................37,000 Kgs * £ 7.50 = £ 277,500
Variance:................................................................£ 7,500 (F)

but then this does not agree to the formula i was given of
SQSP-AQSP for the direct usage variance gives me

or am i missing something basic - should i not be using this formula for this question?

crispy

Hi

When I did PEV I did not try and memorise formulas as I thought I would just get into a muddle/panic and forget them come the actual exam. If you have a look at my attempt for Direct Material Usage you would be comparing the Kgs used (as opposed to price which is kept constant), if you were looking at material price then compare the cost per kg - and keep the usage constant.

This may not be overly helpful but I think you would be better off trying to learn what you are trying to calculate rather than memorising lists of formulas.

SandyHood

The standard materials per unit is 2 kg (40,000 kgs/20,000 units)
The standard cost per kg is £7.50 ~ which you have already calculated

The standard cost of the actual material used (AQSP) is 37,000 x £7.50
The standard cost of actual production is 19,000 units x 2 kg/unit x £7.50

SandyHood

And crispy has done the rest

I think the crux to this issue is that you must look at the variance between the standard cost of the actual units produced (what the examiner refers to as flexing the standard cost to actual output)
and the standard cost of what was used to produce it (the standard cost per kg flexed to the kilograms input)
You had tried to use the standard cost of the budgeted production (rather than the actual production)

noodles

oh this is so hard, thank you for the help, i will try and get my head around it today. only have unit 8 and 9 to go so there is no choice, i have to understand this. Home studying can be so hard and especially when you are of a certain age!!

crispy

Tell me about it

I have the 3 three cima finals to sit and all i have are some BPP books and a couple of CD's for company as I just cannot afford any tuition (it would cost around £ 2,000 for lessons for all 3).

Standard costing is one of those things that at first looks difficult, but after practicing with different question types will gradually become easy. You know you have cracked it when you can compete a past exam question and it becomes so easy it is boring.

noodles

I have just done several exercises and now getting them right!! once I got my head around understanding what I was calculating and not trying to find a formula it began to click into place - thank you all for your advise.