CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 38
Accounting in context
A clean performance
Learners’ answers may include:
• Uses financial information to assess performance. Helps to focus on larger differences and encourages
investigation and corrective action to improve business performance.
• The first year’s performance gives Faiza useful information that she can draw on when budgeting for
year 2. There was no equivalent information when preparing the budgets for year 1.
• Comparisons can be time consuming and do not explain the causes of the differences. The causes will
still need to be investigated.

Activities
Activity 38.1
The standard direct labour cost to make the products in three months will be:

Total standard hours Total standard

wage cost [1]
$ $
10 000 curtains: 2 hours at $12 per hour 20 000 240 000
8 000 sheets: 1 hour at $12 per hour 8 000 96 000
Total standard hours and wages cost of production 28 000 336 000

Note:
[1] The total for each product is the total time taken × $12.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

The standard material costs of production are as follows:

Total standard Total standard

material in metres material cost [1]
$ $
10 000 curtains: 5 metres of cotton at $4 per metre 50 000 200 000
8 000 sheets: 2 metres of cotton at $4 per metre 16 000 64 000
Total standard quantity and cost of material for production 66 000 264 000

Note:
[1] The total amount of metres required is multiplied by $4 per metre.

Budgeted fixed overheads at $266 000. It is absorbed on the basis of direct labour hours, therefore the
standard overhead absorption rate is $9.50 ($266 000 ÷ 28 000 hours).

Budgeted profit statement for the next three-month period

Curtains Sheets Total
$ $ $
Revenue 900 000 320 000 1 220 000
Direct materials (200 000) (64 000)   (264 000)
Direct labour (240 000) (96 000)   (336 000)
Fixed overhead (at $9.50* per direct labour hour) (190 000) (76 000)   (266 000)
Budgeted profit 270 000 84 000   354 000

Note: $266 000

[1] OAR = hours = $9.50
28 000

Activity 38.2
Baqri Ltd
Flexed budget statement for the 6 months to 30 June:
Actual Budget Variance
$ $ $
Units 15 600 15 600
Revenue 20 × 15 600 312 000 22 × 15 600 343 200 (31 200)
Direct materials 1 × $3 × 15 600 (46 800) 1.2 × 4 × 15 600 (74 880) 28 080
Direct labour 0.5 × $14 × 15 600 (109 200) 4 (124 800) 15 600
× $12 × 15 600
6
Contribution 156 000 143 520 12 480
Fixed overheads (115 000) (110 000) (5 000)
Profit 41 000 33 520 7 480

Activity 38.3
a the sales volume variance
(9 000 × $8) − (10 000 × $8) = $8 000 adverse
b the sales price variance
($10 − $8) × 9 000 = $18 000 favourable

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

c the direct materials usage variance

(9 000 − 9 900) × $5 = $4 500 adverse
where flexed quantity of material = 1 litre × 9 000 units.
d the direct materials price variance
($5 − $4.50*) × 9 900 = $4 950 favourable
*$44 550
= $4.50
9 900
e the direct labour efficiency variance
(*1 500[1] − 2 250) × $10 = $7 500 adverse
Note:
1
[1] × 9 000 = 1500
6
f the direct labour rate variance
($10 − $11) × 2 250 = $2 250 adverse

Exam-style questions
1 Any two advantages, such as:
• Budgets are likely to be more realistic.
• Variances are easier to identify.
• Standards help with estimating costs of new products.
2 Credit any of the following points:
• Decrease in customer demand through the goods becoming unfashionable or obsolete.
• Selling price has been increased to pass increased costs onto customers.
• Seasonal sales have decreased volume.
• Competition from other businesses has increased.
• Fewer special discounts have been given to selected customers.
• Customers have heard that new, improved products will be available soon and are waiting
for those.
Other relevant points acceptable.
3 a i Material price
$
Standard 26 190 kg × $3 78 570
Actual 75 951
2 619 F

ii Material usage
$
Standard 9 700 units × 2.75 kg 26 675
Actual 26 190
485 kg
× $3
1 455 F

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

iii Labour rate

$
Standard 12 610 × $5 63 050
Actual 65 572
2 522 A

iv Labour efficiency
$
Standard 9 700 units × 1.5 hours 14 550
Actual 12 620
1 940 hours
× $5
9 700 F

v Fixed production overhead expenditure

$
Standard 10 000 units × $3.75 37 500
Actual 39 750
2 250 A

vi Sales price
$
Standard 9 700 units × $27 261 900
Actual 258 375
  3 525 A

vii Sales volume

$
Standard 10 000
Actual 9 700
300 units
*Standard profit per units × $7.50
$2 250 A

Note:

[1] Per unit

* Working: Selling price $27.00
Total cost $19.50
Standard profit $7.50

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

b Reconciliation statement
$ $
Budgeted profit 75 000
Add favourable variances:
Material price 2 619
Material usage 1 455
Labour efficiency 9 700
88 774
Deduct adverse variances:
Fixed production overhead volume ((10 000 − 9 700) × $3.75) 1 125
Fixed production overhead expenditure 2 250
Labour rate 2 522
Selling price 3 525
Sales volume 2 250 11 672
Actual profit 77 102 [1]

Note:
[1] $
Actual sales 258 375
Less direct materials 75 951
Direct labour 65 572
Fixed production overheads 39 750
77 102

c The price increase would:

Increase the cost by $5 238
or alternative answer
Change the material price variance from favourable to adverse by $5 238.
or alternative answer
Change the material price variance from 2 619 F to 2619 A.
Working:

$
Old actual unit price 26 190 kg × $2.90 75 951
New actual unit price 26 190 kg × $3.10 81 189
Increase in cost 5 238

An increase in material price/adverse variance will show a decrease in future profits. Will Tareq
increase his price? Possible effect on demand. Standard costs will need to be revised. Will the
supplier offer discounts, e.g. for bulk buying? Will the quality change due to the change in
price – better or worse? Can a cheaper supplier be found? Will another supplier be reliable, e.g.
delivery, quality?

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

4 a Statement of budgeted profit for October

$ $
Revenue (10 000 × $60) 600 000
Direct materials (10 000 × 3 kg × $4) (120 000)
Direct labour (10 000 × 2 hours × $10) (200 000) (320 000)
Contribution 280 000
Fixed overheads (10 000 × $8) (80 000)
Budgeted profit 200 000

b Actual Budget Variance

Units 11 000 11 000
Revenue ($) 11 000 × 58 638 000 11 000 × 60 660 000 (22 000) A
Direct materials ($) (133 980) 11 000 × 3 × 4 (132 000) (1 980) A
Direct labour ($) (181 500) 11 000 × 2 × 10 (220 000) 38 500 F
Contribution ($) 322 520 308 000 14 520 F
Fixed overheads ($) (100 000) (80 000) (20 000) A
Profit ($) 222 520 228 000 (5 480) A

c i Labour rate variance = (standard wage rate – actual wage rate) × actual hours worked
($10 – $11) × 16 500 [1] = $16 500 adverse
  

Note:
$181 500
[1] where actual hours worked is
$11
ii Labour efficiency = (flexed budget hours – actual hours) × standard wage rate
(22 000 − 16 500) × $10 = $55 000 favourable
iii Sales price
(actual price – standard price) × actual units = ($58 – $60) × 11 000 = $22 000 adverse
iv Sales volume
(actual sales volume – original budgeted sales volume) × standard price
= ( 11 000 – 10 000) × $60 = $60 000 favourable
d Possible causes of a favourable labour efficiency variance
• better skilled workers were employed who work more efficiently than the standard
• highly motivated staff
• good quality materials and/or machinery for staff to work with.

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
6 © Cambridge University Press 2021