Management accounting Essay Example
1. Calculate the following variances and, in each case, indicate if the variance is favourable (F) or unfavourable (U):
Direct Materials Price Variance = (Actual quantity purchased × Actual price)- (actual quantity purchased × Standard price)
Direct Materials Quantity Variance = (Actual Quantity used× Standard price) – (standard Quantity allowed × Standard price)
= (22000×0.35) – (20000×0.35)
Direct Labour Rate Variance = (Standard Direct Labour rate ×Actual Direct Labour Hours)- (actual Direct Labour Rate × Actual Direct Labour Hours)
= (3020×4) – (3020× 4.743)
Direct Labour Efficiency Variance = (Actual Hours Worked × Standard rate) × (Standard hours allowed ×standard rates)
Assume no costs other than direct materials and direct labour are incurred by Real Liquid Drinks and all production for the month is sold within that month (i.e. there is no opening or closing inventory).
If standard costs for January are based on sales of 9,500 units at $7.50 per unit, how much profit should Real Life Drinks make?
Sales = 9500×7.50= $71250
Less direct materials (0.70×9500) $(6650)
Less Direct Labour (0.8×9500) $ (7600)
Profit expected $57000
You determine that actual sales for January are 10,000 units at $7.50 per unit and actual profit, after allowing for direct materials and direct labour expenses, is $49,675. Briefly explain to the manager of Real Life Drinks why less profit was made during January even though more units were produced and sold than expected.
The decrease in profit is as a result of an increase in the variable costs which comprises of direct material and direct labour expenses. The margin brought about by the increase in sales is lower than the increase in the variable cost and hence the decrease in the overall profits.
Howard, D2007, Principles of Management accounting, Avebury: Aldershot.
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