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Solution to Problem- 3-2
a) Purchasing manager
The purchasing manager believes that he has performed well as he has reduced purchase costs by using a new
supplier. The material price variance is favourable by $48,000 which could be due to good negotiating and buying
skills, a reduction in quality or changing market conditions. The market for the purchase of seeds is stable, so the
price reduction is not due to market conditions.
The material usage variance is significantly adverse at $52,000 indicating that wastage has increased.
Poorer quality seed could be responsible for this. Alternatively, labour problems may have resulted in increased
wastage. However, the labour efficiency variance is favourable so this looks less likely to be the cause.
The sales price variance is also significantly adverse at $85,000 and this indicates that the price of the product had
to be reduced. Again, given that the market for the product is stable, the cause could be assumed to be quality
issues caused by the purchase of poorer quality seed. This could also explain the fall in sales resulting in an adverse
sales volume variance of $21,000.
Therefore, rather than performing well as he believes, it could be argued that the production manager is
responsible for a loss amounting to $110,000 (85,000 + 52,000 + 21,000 – 48,000).
Production director
The production director feels unfairly criticized for increasing the labour rate. His actions resulted in an adverse
labour rate variance of $15,000. This adverse variance can be justified if labour efficiency improved as a result. The
labour efficiency variance was $18,000 favourable and the labour idle time variance was also favourable by $12,000.
These variances indicate an improvement in the productivity of the workforce, even though they were working
with poorer quality materials.
The total effect of the production director’s actions in increasing the wage rate is an increase in profits of $15,000
(18,000 + 12,000 – 15,000). The improvement may however only be temporary, as workers become accustomed to
the new wage level and their efficiency and motivation drops again.
b) Standard contribution per ton:
Amount in $ Amount in $
Sales price 240
Less:
Rice seed (1.4 tons X $60) 84
Labour (2 hours X $18 X 10/9) 40
Variable overhead (2 hours X $30) 60
Marginal costs of production 184
Standard contribution 56
219
Variances:
Selling price variance
Amount in $
8,000 X $(1,800,000/8,000 – 240)
120,000 (A)
Sales volume variance Tons
Actual sales in tons 8,000
Budgeted sales
in tons
8,400
Variance in tons
400 (A)
× $56
22,400
(A)
Material price variance
12,000 tons should have cost (X $60) 720,000
but did cost 660,000
60,000 (F)
Material usage variance
8,000 tons should use (X 1.4) 11,200 tons
but did use 12,000 tons
Variance in tons 800 tons
X standard cost per ton × $60
48,000 (A)
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Labour rate variance
15,800 hours should cost (X
$18)
284,400
but did cost
303,360
18,960
(A)
Labour efficiency variance
8,000 tons should take (X
2 hours)
16,000 hours
but did take 15,000 hours
Variance in hours 1,000 (F)
X standard rate per hour (X $18/0.9) X $20
20,000 (F)
Idle time variance
Idle time should have been (10% x 15,800) 1,580 hours
but was (15,800 – 15,000) 800 hours
Variance in hours 780 (F)
x
standard rate per hour
x
$20
15,600
(F)
Variable overhead expenditure variance
Budgeted variable production overhead (15,000 x
$30)
450,000
Actual expenditure
480,000
30,000
(A)
Variable overhead efficiency variance
8,000 tons should take (X 2 hours) 16,000 hours
but did take 15,000 hours
Variance in hours 1,000 (F)
X standard rate per hour x $30
30,000 (F)
Fixed cost expenditure variance
Budgeted fixed costs 210,000
Actual fixed costs
200,000
10,000
(F)
Budgeted profit statement
Amount in $
Amount in $
Sales (8,400 tons X $240) 2,016,000
Less: Rice seed (1.4 tons x $60 x 8,400 tons) 705,600
Labour (2 hours x $20 x 8,400 tons) 336,000
Variable overhead (2 hours x $30 x 8,400 tons)
504,000 1,545,600
Contribution 470,400
Less
fixed costs 210,000
Budgeted profit 260,400
Operating statement:
Budgeted contribution…………
470,400
Variances
Favourable
Adverse
Sales price
120,000
Sales volume
22,400
(142,400)
Material price 60,000
–
Material usage –
48,000
Labour rate –
18,960
Labour efficiency 20,000
–
Idle time 15,600
–
Variable overhead efficiency 30,000
–
Variable overhead expenditure
–
30,000
125,600
96,960
28,640
Actual contribution
356,640
Budgeted fixed cost:
210,000
Less:
Fixed cost expenditure variance
10,000
Actual fixed cost
200,000
Actual profit 156,640
Solution
Solution: Process Costing – Rao Incorporated – 4-1
Department A
Physical Flow of Production Equivalent Units
Physical Units
DM Conversion
WIP, beginning 3,100
Units started 64,400
To account for 67,500
Units completed and transferred 60,000
60,000 60,000
WIP, ending 4,000 4,000 1,400
(4,000 × 35%)
Spoilage (67,500 – 64,000 = 3,500):
Normal spoilage (60,000 × 5% = 3,000) 3,000
3,000 2,550
(3,000 X 85%)
Abnormal spoilage (3,500 – 3,000 = 500) 500
500 425
(only 85% of conversion applied to spoilage) (500 X 85%)
Total units accounted for 67,500
Work done to date 67,500 64,375
Less: work done on beginning inventory in prior period:
DM (100% applied b/c DM added last period) (3,100)
Conversion (70% applied b/c 70% added last period) (2,170)
(3,100 × 70%)
Work done during current period 64,400 62,205
Financial Flow of Production Cost of Production
WIP, beginning (DM 21,700 + conv. 11,935) $ 33,635 – –
Current costs 314,975 $183,300 $131,675
To account for $348,610
Divide by equivalent units 64,400 62,205
Cost per equivalent unit $4.96306 $2.84627 $2.11679
Application of total costs:
Units started and completed (60,000 – 3,100) $282,398 $161,953 $120,445
Cost of beginning inventory: (56,900 x 2.84627) (56,900 x 2.11679)
Beg. Inventory – previously completed 33,635 21,700 11,935
Material (0% added b/c added last period) 0 0 –
Conversion cost (30% added this period) 1,969 – 1,969
(3,100 x 30% x 2.11679)
Cost of normal spoilage 13,937 8,539 5,398
(3,000 x 2.84627) (2,550 x 2.11679)
Total cost of goods transferred to Dept. B $331,939
Abnormal cost (write-off) $ 2,323 $ 1,423 $ 900
(500 x 2.84627) (425 x 2.11679)
Ending WIP 14,349 11,385 2,964
(4,000 x 2.84627) (1,400 x 2.11679)
Total costs accounted for $348,611
(difference of $1 due to rounding) $205,000 $143,611
DM and conversion cost reconciliation
Current costs $183,300 $131,675
Beginning inventory costs 21,700 11,935
All costs accounted for $205,000 $143,610
Continued to page-2
Department B
Physical Flow of Production Equivalent Units
Physical
Units
Transf. In DM Conversion
WIP, beginning (60% complete) 4,500
Units transferred in 60,000
To account for 64,500
Good units completed and transferred 52,000 52,000 52,000 52,000
WIP, ending (80% complete) DM added @ 75% and CC evenly 6,500 6,500 6,500 5,200
(6,500 × 80%)
Spoilage (64,500 – 58,500 = 6,000):
Normal spoilage (52,000 × 8%) 4,160 4,160 4,160 3,952
(4,160 x 95%)
Abnormal spoilage (6,000 – 4,160) 1,840 1,840 1,840 1,748
(1,840 x 95%)
Work done to date 64,500 64,500 64,500 62,900
Less: work done on beginning inv. in prior period:
No material added b/c added last perid, all trnsfrd in completed last period (4,500) 0 0
Conversion (60% complete in prior period) 0 0 (2,700)
(4,500 x 60%)
Work done during current period 60,000 64,500 60,200
Financial Flow of Production Cost of Production
WIP, beginning (con $46,000 + tran. $24,000) $ 0,000 — — —
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