Kranberry Networks Ltd had implemented a standard costing system to aid it in assessing the performance of its operations. In the first quarter of the current year, the company had the following variances: Direct materials price variance £ 1,200 favourable Direct materials quantity variance £ 324 unfavourable Direct labour rate variance £ 3,375 favourable Direct labour efficiency variance £ 90 unfavourable The following additional information is provided for the first quarter:
Kranberry Networks Ltd had implemented a standard costing system to aid it in assessing the performance of its operations. In the first quarter of the current year, the company had the following variances: Direct materials price variance £ 1,200 favourable Direct materials quantity variance £ 324 unfavourable Direct labour rate variance £ 3,375 favourable Direct labour efficiency variance £ 90 unfavourable The following additional information is provided for the first quarter:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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| Kranberry Networks Ltd had implemented a |
| Direct materials price variance | £ | 1,200 | favourable |
| Direct materials quantity variance | £ | 324 | unfavourable |
| Direct labour rate variance | £ | 3,375 | favourable |
| Direct labour efficiency variance | £ | 90 | unfavourable |
| The following additional information is provided for the first quarter: |
| Actual quantity of raw materials used per unit | 4.00 | kg | |
| Actual cost of raw material per kg | £ | 7.00 | |
| Actual time taken to manufacture one unit | 3.00 | hours | |
| Actual wage rate per hour | £ | 8.25 | |
| Actual cost of direct material purchased and used | £ | 42,000 | |
| Actual direct wages paid | £ | 37,125 | |
| The company hired a new supervisor in the beginning of the second quarter. Based on the supervisor’s inputs, the company replaced faulty machines. The company has reskilled its labour workforce to bring in efficiency in its production process. |
| The company’s cost records for the second quarter of the year are given below: |
| Actual quantity of raw materials used per unit | 3.50 | kg | |
| Actual cost of raw material per kg | £ | 6.50 | |
| Actual time taken to manufacture one unit | 2.50 | hours | |
| Actual wage rate per hour | £ | 8.50 | |
| Actual cost of direct material purchased and used | £ | 34,125 | |
| Actual direct wages paid | £ | 31,875 | |
| Required: | |
| 1. | Determine the following standards based on the variances and actual values provided for the first quarter. |
| (a) Standard price per unit of raw material (Round your answer to 2 decimal places.) | |
| (b) Standard quantity of materials to be used in production in a quarter | |
| (c) Standard rate per hour of direct labour work (Round your answer to 2 decimal places.) | |
| (d) Standard hours of work allowed for a quarter’s production | |
| 2. | Based on the standards determined in requirement 1, compute the following variances for the second quarter of the year. |
| (a) Direct materials price variance | |
| (b) Direct materials quantity variance | |
| (c) Direct labour rate variance | |
| (d) Direct labour efficiency variance | |
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