Management Accounting

2A
COAGA2-22

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Review:
Lesson 07: Full Costing (Job and
Process Costing)
Lesson 08: Absorption and Variable
Costing
Questions for Discussion
Lesson 09: Budgeting
Pre-assessment Quiz 2 Closes 12 June 23:59. 60% required to access Online Test 2.

Online Test 2 15 June 12 pm – 16 June 12 pm

Lesson 07 Discuss the terms “heterogenous” and “homogenous” in terms of full costing techniques.

Lesson 08 Differentiate between “marginal income” and “gross profit” in line with the absorption and variable costing methods

Lesson 09 What is the difference between fixed and flexible budgeting?

Lesson 09 Discuss the linear equation: y = a + bx in terms of flexible budgeting

 What will be
covered in
Standard today’s lesson?
Costing Introduction

& Variance
Analysis Variances

Material and Labour Variances

Variable Manufacturing and Non-manufacturing Overheads

Class
Sales Activity 2
Price Variance
Standard Costing & Variance Analysis
Introduction
Uses of standard costing

Possible purposes would be to improve control over the physical

inventory, to control the use of time, to determine the cost price of
manufactured products more accurately, etcetera.
Variances

 A variance is the difference between the standard costs and the actual costs of
manufacturing the product on the one hand, and the difference between the
standard selling price and the actual selling price on the other hand.

 The calculation of the variance is the point of departure in determining the

possible causes or reasons for the variance, which could suggest what action,
would be necessary to eliminate similar variances in future.

 Variances may be favourable (positive) or unfavourable (negative).

Basic Formula for Calculating Variances

Actual Cost minus Standard Cost = Variance

(AQ x AP) minus (SQ x SP)

Actual Quantity x Actual Price = Total Actual Cost Standard Quantity x Standard Price = Total Standard Cost

AQ x AP = TAC SQ x SP = TSC
Price & Rate Variances

Common Element

(AQ x AP) minus (AQ x SP) AQ x (SP – AP)

Common Element

(AH x AR) minus (AH x SR) AH x (SR – AR)

Quantity & Efficiency Variances

Common Element

(AQ x SP) minus (SQ x SP) SP x (AQ – SQ)

Common Element

(AH x SR) minus (SH x SR) SR x (AH – SH)

Material Variances
Example
Week 6: Lesson 15.1 – Variances

AQ > SQ = Unfavourable/Adverse variance

AQ < SQ = Favourable Variance
Labour Variances
Class Activity 1
AMALANG Ltd has developed a special pill called COMAAX that is
expected to help with understanding COMAA modules. The company’s
costing reports show the following information:

- A standard quantity of four direct labour hours at a standard rate of R3

per hour is allowed in order to produce one unit of product COMAAX.
- The wage records show that it took 4 200 hours at a rate of R2,95 per
hour to produce 1 000 units of product COMAAX

REQUIRED:

Calculate the following labour variances:

a. Labour rate variance
b. Labour efficiency variance
c. Total labour variance
AR > SR = Unfavourable/Adverse variance
AR < SR = Favourable Variance
Variable Manufacturing Overheads
Variances
Class Activity 2

AMARA Ltd.’s overheads for June 2023 are as follows:

Budgeted
Variable manufacturing overheads that vary with hours worked:

Budgeted Actual
Hours worked R10 000 R9 840
Labour hours 400 hours 410 hours
Production 500 units 525 units

REQUIRED:

Calculate the total variable manufacturing overheads variance for the period for
overheads that vary with hours worked.
Class Activity 3

AMARA Ltd.’s overheads for June 2023 are as follows:

Budgeted
Variable manufacturing overheads that vary with production:

Budgeted Actual
Manufacturing overheads R80 000 R78 000
Production 32 000 units 30 000 units

REQUIRED:

Calculate the variable manufacturing overhead rate variance for the period for
overheads that vary with production.
Sales Price Variances
Class Activity 4 – Selling Price
Variance

AMARA Ltd sold 2 600 tennis balls for R46 950. The standard price per
ball is R18

REQUIRED:

Calculate the selling price variance.

Reconciling Actual Results with Budgeted
Results
AMARA Ltd manufactures a single product: an exotic dessert for upmarket restaurants.

The standard variable cost per unit is as follows:

Direct materials : 1,6kg @ R25 per kg R40

Direct labour : 0,8 hours @ R40 per hour R32
Variable manufacturing overheads :0,8 hours @ R7,50 per hour R6
Variable selling and distribution costs R14
Actual results for AMARA Ltd were as follows:

Material purchased and consumed : 10 000 kg @ R22,50 per kg

Direct labour : 3 000 hours @ R50 per hour
Variable manufacturing overheads R25 000
Variable selling and distribution costs R75 000
Sales R725 000
Units manufactured and completed 5 000 units
Units sold 5 000 units
Class Activity 5: Reconciling Actual Results
with Budgeted Results
Additional information
1. There was no opening and closing inventory
2. Fixed manufacturing overheads amounted to 48 000 (budgeted R38 400)
3. Fixed administration overheads amounted to R32 000, which was in line
with the budget.

REQUIRED:
1.Calculate and analyse the following variances:
a. Total material variance
b. Material purchase price variance
c. Material quantity variance
d. Total labour variance
e. Labour rate variance
f. Labour efficiency variance
g. Total variable manufacturing overhead variance
h. Variable manufacturing overheard rate variance
i. Variable manufacturing overhead efficiency variance
j. Variable selling and distribution cost expenditure variance
k. Selling price variance
2.Reconcile the actual results with the budgeted results.
Class Activity
Questions for Discussion

Question 1 What are the causes of negative variances?

Question 2 What do you understand by the term “allowed quantity”?

Question 3 What is the purpose of calculating variances?

Question 4 What are the likely causes of labour rate and labour efficiency variances?

Question 5 What are the likely causes of material price variances?

 Quiz
1. Variances can also be calculated for budgets. True or False?

2. A price variance is the responsibility of ______________ while a

labour rate variance is the responsibility of _____________.

a. Suppliers to the company

b. Human resources manager

c. Sales manager

d. Production manager
What Happens
Next?
To be completed before the next Lecture-led session (self-directed learning and assessments):
• Pre-assessment Quiz 2
• Online Test 2
• Lesson 11: Practice Quiz (11.2)
• Lesson 11: Practice Activities (11.3)
• Lesson 11: Tutorial on variance ananlysis (11.4)
• Self-assessments

What will be covered in the next Lecturer-led session:

• Relevant costs
• Target costing
• Life cycle costing and other approaches to managing costs and qaulity