Question 3: Variance Analysis (20 marks in total) The following standard cost da

Question

Question 3: Variance Analysis (20 marks in total) The following standard cost data relate to the operation of Dragon Company for 2016. The standard cost per unit is based on the normal annual production of 15,000 units. Standard cost per unit Direct materials 4kg @ $5.00 per kg $ 20.00 Direct labour 2hrs @ $12.50 per hr $ 25.00 Variable overhead 2hrs @ $3.00 per hr $ 6.00 Fixed overhead 2 labour hrs @ $5.00 per hr $ 10.00 Total $ 61.00 Actual production in 2016 was 10,000 units. The following data was obtained from Dragon Company’s records: Direct material purchases 45,000 Kilograms Cost of direct materials purchases $ 202,500 Actual direct labour hours 25,000 Hours Actual direct labour costs $ 325,000 Actual variable overhead costs $ 100,000 Actual fixed overhead $ 125,000 Required: 3a. Calculate and show flexible budget variance for each cost item.

Explanation / Answer

Direct Material Price Variance = (SP – AP) * AQ

SP = $5

AP = $202500/45000 kg = $4.50

AQ = 45000 Kg

(5 – 4.5) * 45000 = 22500 (F)

Direct Material Quantity Variance = (SQ-AQ) * SP

SQ = 10000 units * 4 kg = 40000 kg

(40000 – 45000) * 5 = 25000 (U)

Direct Labour Rate Variance = (SR – AR) * A Hrs

SR = $12.50

AR = $325000/25000 hrs = $13

A Hrs = 25000

(12.50 – 13) * 25000 = 12500 (U)

Direct Labour Efficiency Variance = (S Hrs – A Hrs) * SR

S Hrs = 10000 * 2 hrs = 20000 hrs

(20000 – 25000) * 12.50 = 62500 (U)

Variable O/H Rate Variance = (SR – AR) * A Hrs

SR = $3

AR = $100000/25000 = $4

(3 – 4) * 25000 = 25000 (U)

Variable O/H Efficiency Variance = (S Hrs – A Hrs) * SR

(20000 – 25000) * 3 = 15000 (U)

Fixed O/H Total Variance :-

Absorbed – Actual

Absorbed = $5 * 10000 * 2 hrs = $100000

Actual = $125000

Variance = 100000 – 125000 = $25000 (U)

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