Question

Answer 1

REQUIREMENT A

 

1. Material usage variance

Calculation :

= (Standard Quantity for actual output - Actual Quantity) x Standard price per kg

= ( 2,200 -4,400) x 5  = 11,000 (U)

Note - Standard Quantity for actual output = 2,200 units x 1 kg   = 2,200 kg

Explanation :

Kaffee ltd has an unfavourable material usage variance due to higher consumption of material during the period as compared with the standard usage.

 

2. Material Price Variance

Calculation:

= ( Standard price - Actual Price ) x Actual Quantity

= (5 -3) x 4,400 = 8,800 (F)

Note - Actual price of raw material per kg      = £13,200/4,400 kg     = £3 per kg

Explanation :

Kaffee ltd has a favourable material price variance as it has spent less on the purchase of materials than anticipated.

 

3. Labour Efficiency Variance

Calculation :

= (Standard Hours for actual output - Actual hours) x Standard rate per hour

= (4,400 -2,200) x 4      =  8,800(F)  

Standard Hours for actual output = 2,200 units x 2 hours   = 4,400Hours

Explanation :

Kaffee ltd has a favourable Labour efficiency variance, it will mean that the labour is working in the way it should and the hours used by labour in the production are the hours that are standardized by the Kaffee ltd in the budget due to higher consumption of material during the period as compared with the standard usage.

 

4. Labour Rate Variance

 

Calculation:

= ( Standard Rate - Actual rate ) x Actual Hours

= (4- 8) x 2,200   = 8,800 (U)

Where Actual rate per hour =£17,600/2,200 hours  =£8 per hour

Explanation :

Kaffee ltd has an unfavourable Labour Rate variance as the Kaffee ltd paid more per hour of labour than what it has estimated. This could be due to employing more skilful workers.