2276 Chapter 35

Chapter 35 Standard costing
Q1 Kings Ltd
(a) Budget statement for the production of 10 000 Gonkeys
Process 1 Process 2
$ $
From process 1 760 000
Materials (10 000 × 2 × $8) 160 000 (10 000 × 4 × $6) 240 000
Labour (10 000 × 2 × $10) 200 000 (10 000 × 4 × $12) 480 000
Overhead (20 000 × $20) 400 000 (40 000 × $23) 920 000
Transferred to process 1 760 000 Finished goods 2 400 000
(b) Flexed budget statement for the production of 9500 Gonkeys [9000 + (1000 × 50%)]
Process 2
$
From process 1 (9500 × $76) 722 000
Materials (9500 × 4 × $6) 228 000
Labour (9500 × 4 × $12) 456 000
Overhead (9500 × 4 × $23) 874 000
2 280 000
(c) Ledger accounts for actual production

Process 1 account (10 000 Gonkeys)
$ $
Material (10 000 × 2.22 × $8.25) 183 150
Labour (10 000 × 2.25 × $11.50) 258 750 Production transferred
Overhead (10 000 × 2.25 × $20) 450 000 process 2 891 900
891 900 891 900
Process 2 account (9 complete Gonkeys)

$ $
Materials from process 1 891 900
Added materials
(9500 × 3.75 × $6.2) 220 875
Labour (9500 × 4.5 × $11.50) 491 625 Finished goods (note) 2 409 210
Overhead (9500 × 4.5 × $23) 983 250 Work in progress c/d (note) 178 440
2 587 650 2 587 650
Note Finished goods Work in progress

$ $
($891 900 × 0.9) 802 710 ($891 900 × 0.1) 89 190
($1 695 750 × 9/9.5) 1 606 500 ($1 695 750 × 0.5/9.5 89 250
2 409 210 178 440
(d) (i) Materials price variance $(8.0 – 8.25)22 200 $5 550 (A)
(ii) Materials usage variance (20 000 – 22 200)$8 $17 600 (A)
(iii) Labour efficiency variance ( 38 000 – 42 750)$12 $57 000 (A)
(iv) Labour rate variance $(12 – 11.50)42 750 $21 375 (F)
(e) The advantages of standard costing. Any four of the following:

• The preparation of budgets is made easier if they are based on standard costs, and the budgets are likely to
be more realistic.
• Differences between actual and budgeted results (variances) are easier to identify if standard costs are
used.
• The activities that are responsible for variances are highlighted.
• Standard costing is an essential part of responsibility accounting because it highlights activities that give
rise to variances (See §34.2.).
• Estimated costs of new products and quotations for orders may be prepared more efficiently when
standard costs for materials and operations have been calculated.
• Although standard costing is usually associated in people’s minds with manufacturing industries, it is
equally useful in all kinds of businesses, including service industries such as hotels and hospitals.
• Valuation of stock at standard cost is acceptable for the purposes of the Companies Act 1985 and the
accounting standards, if the standards approximate to actual cost and are reviewed regularly.
Q2 Pembroke Ltd
120 000
(a) Working: No. of Tripos: budgeted direct labour ÷ hours per Tripos = 30
= 4000
Budgeted Manufacturing, Trading and Profit and Loss Account
for the three months ending 30 June 2005
$
Direct material (4000 × 2 × $7) 56 000
Direct labour (4000 × 3 × $10) 120 000
Direct production expenses (4000 × 3 × $14) 168 000
Total of variable expenses 344 000
Indirect fixed overheads (4000 × 3 × $30) 360 000
Cost of production 704 000
Factory profit (20%) 140 800
Transferred to trading account 844 800
Sales (4000 × $250) 1 000 000

Less cost of goods sold 844 800
Gross profit 155 200
Selling and administration 32 000
Net profit on trading 123 200
Factory profit 140 800
Total net profit 264 000
(b) Contribution per unit 1 000 000 - 344 000

4000
= $164
Break-even point = 360 000164
+ 32 000
= 2391 Tripos
Margin of safety 1609
4000
× 100 = 40.2%
(c) (i) Flexed budget based on the production and sale of 4180 Tripos
$ $
Sales (4180 × $250) 1 045 000
Direct materials (4180 × 2 × $7) 58 520
Direct labour (4180 × $30) 125 400
Direct overheads (variable) (4180 × 3 × $14) 175 560 359 480
685 520
Fixed overheads ($360 000 + $32 000) 392 000
Net profit 293 520
(ii) Actual
$ $
Sales (4180 ×X $248) 1 036 640
Direct materials (8990 × $6.80†) 61 132
Direct labour (14 630 × $9.50*) 138 985
Direct overheads (variable) (4180 × 3 × $14) 175 560 375 677
660 963
Fixed overheads ($372 000 + $42 000) 414 000
Net profit 246 963
† $ 618990
132
= $6.80 * $138 985
14 630
= $9.50
(d) (i) Quantity variance $(293 520 – 264 000) $29 520 (F)
(ii) Sales volume $(1 045 000 – 1 000 000) $45 000 (F)
(iii) Sales price $(1 045 000 – 1 036 640) $8 360 (A)
(iv) Direct material usage (8360 – 8990) × $7 $4 410 (A)
(v) Direct material price $(7.00 – 6.80) × 8990 $1 798 (F)
(vi) Direct labour efficiency (12 540 – 14 630)$10 $20 900 (A)
(vii) Direct labour rate $(10.00 – 9.50)14 630 $7 315 (F)
$660 963
(e) Contribution per unit 4 180
= $158.13
$ 414 000
Break-even point $158.13
= 2619 Tripos
(f) Reconciliation of budgeted profit with actual profit

$ $
Profit per master budget 264 000
Add favourable variances
Quantity 29 520
Materials price 1 798
Labour rate 7 315
302 633
Deduct adverse variances
Sales price 8 360
Materials usage 4 410
Labour efficiency 20 900
Fixed production expenditure 12 000
Selling and distribution 10 000 55 670
Actual profit 246 963

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Chapter 35 Standard costing

(a) Budget statement for the production of 10 000 Gonkeys

(c) Ledger accounts for actual production

Process 2 account (9 complete Gonkeys)

Note Finished goods Work in progress

(e) The advantages of standard costing. Any four of the following:

Sales (4000 × $250) 1 000 000

(b) Contribution per unit 1 000 000 - 344 000

(f) Reconciliation of budgeted profit with actual profit

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