Paterson Ltd manufactures a laboratory product for the UK market. The following budget and actual operating profits have been provided by the company, for the production of 5000 units of the product in the first quarter of the year. Budget (£) Actual (£) Sales revenue 157,500 156,450 Less Raw materials (63,000) For 63,000 kg (61,800) For 60,750 kg Less Labour (31,500) 3,937.5 hrs (31,950) 3,900 hrs Less Fixed overheads (30,000) (29,100) operating profit 33,000 33,600 Required: Based on the above information a) Produce a variance statement of the following variances, clearly indicating whether they are adverse or favourable. (i) Labour rate variance; (ii) Labour efficiency variance; (iii) Material price variance; (iv) Material usage variance; (v) Fixed overhead variance; (vi) Sales price variance. (b) Discuss the above variances, providing possible reasons for both the material and the labour variance.
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.
Accounting
Paterson Ltd manufactures a laboratory product for the UK market. The following budget and actual operating profits have been provided by the company, for the production of 5000 units of the product in the first quarter of the year. Budget (£) Actual (£) Sales revenue 157,500 156,450 Less Raw materials (63,000) For 63,000 kg (61,800) For 60,750 kg Less Labour (31,500) 3,937.5 hrs (31,950) 3,900 hrs Less Fixed
a) Produce a variance statement of the following variances, clearly indicating whether they are adverse or favourable. (i) Labour rate variance; (ii) Labour efficiency variance; (iii) Material price variance; (iv) Material usage variance; (v) Fixed overhead variance; (vi) Sales price variance.
(b) Discuss the above variances, providing possible reasons for both the material and the labour variance.
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