Osborne book Practice assessment 2 question 6

jmh

Hello,

I would be very grateful if someone could help me with this. I thought I understood this but clearly not.

Activity data items produced KG materials Cost

Budget 12,000 30,000 37,500
Actual 14,000 38,500 40,000
you need to calculate the following:

Standard direct material cost of production
Variances:
Material price
Material usage
Material cost

I calculated the standard direct material cost which is 43,750

It would help me if someone explain to me how to do it not just giving me the answers as I know what the answers should be just don't know how to get there.

Thank you in advance

PeterC

Standard:
2.5 kg per unit (30,000 kg/12,000 units)
£1.25 per kg (£37,500/30,000 kg)

38,500 kg actually cost £40,000
Should cost 38,500x£1.25 £48,125
Material price variance £ 8,125 fav

14,000 units used 38,500 kg
Should use 14,000x2.5kg 35,000 kg
Difference 3,500 kg
x £1.25/kg
Material usage variance £4,375 adv

Material cost variance = £8,125 fav - £4,375 adv = £3,750 fav

Based on guidance at https://drive.google.com/file/d/1Hq8n3ak9uhPV-9IdTYkKQsHPpbiCUMK9/view?usp=sharing

jmh

Thank you very much Peter.

I am going to practice with other examples to see if I do understand it.

Once again thank you

PeterC

You're welcome

jmh

Hello Peter,

I was wondering if you can help me with something else. I am struggling with the calculation for labour efficiency variance. I can do the labour rate variance without a problem.


Items produced Labour hours cost

Budget 24300 8100 170100
Actual 23700 8000 165900

I think I am right in saying that the actual labour hours use at standard rate = 168,000?
I looked at the case in the Osborne book tutorial and getting very confused

Thank you

PeterC

Yes, actual hours at standard rate (£21/hr) is £168,000
Standard hours at standard rate is 23,700 units x 0.333333 hrs/unit x £21/hr = £165,900
Labour efficiency variance (168,000 - 165,900) = £2,100 adv

Alternatively, following the guidance at https://drive.google.com/file/d/1Hq8n3ak9uhPV-9IdTYkKQsHPpbiCUMK9/view?usp=sharing is as shown below.

Actual time taken = 8,000 hrs
Hours which should be taken (23,700 units x 0.333333 hrs/unit) = 7,900 hrs
Difference = 100 hrs
Multiplied by standard rate x £21/hr
Labour efficiency variance = £2,100 adv

Personally, I find this easier to remember.

jmh

Thank you Peter.

I don't know why this is causing me so much trouble

PeterC

You're welcome. Lots of people have trouble with this. Like riding a bicycle, it is not fundamentally difficult but it is very difficult to explain in a book.