Sales Budget and Cost Variances: Calculations and Analysis

1
Part A:
Sales budget:
10,000 x £100 = £1,000,000
Production quantitative:
Units
Sales 10,000
Less: Opening inventory 4,000
6,000
Add: closing inventory 2,000
Production required 8,000
Direct material usage budget:
XY: 8,000 x 5 = 40,000
WZ: 8,000 x 3 = 24,000
Material purchase budget:
Direct material XY(units) WZ(units)
Usage 40,000 24,000
Less: opening stock 16,000 9,600
24,000 14,400
Add: desired closing stock (opening stock + 25%) 20,000 12,000
44,000 26,000
x £1 x£0.50
Direct material purchases £44,000 £13,200

2
Direct labour budget:
Production Finishing
Production unit 8,000 8,000
x direct labour hours required x4 x2
32,000 16,000
x direct labour rate per hour x5 x7
Direct labour cost 160,000 112,000
Fixed production overhead budget:
Given: £96,000.
The administration, selling and distribution overhead:
Given: £275,000.
The value of the closing finished stock:
£ £
Unit cost:
Direct material XY: 5 units x £1 5
Direct material WZ: 3 units x £0.50 1.5
6.5
Direct labour for production: 4 x £5 20
Direct labour for finishing: 2 x £7 14 34
Fixed production overhead 12
Total direct cost 52.5
x unit in stock x 2,000
Closing stock value 105,000
Factory overhead absorption rate = £96,000 : (32,000DLH + 16,000DLH) = £2/DLH
Factory overhead per unit = £2 x 6 = £12

3
The cost of goods sold:
£
Opening stock : £52.5 x 4,000 210,000
Manufacturing cost:
Production units x total direct cost = 8,000 x £52.5 420,000
630,000
Less: closing stock: 2,000 x £52.5 105,000
Cost of goods sold 525,000
The budgeted profit and loss account for Wollongong Ltd:
£
Sales 1,000,000
Less: Cost of goods sold 525,000
Gross margin 475,000
Less: administration, selling and distribution overhead 275,000
Budgeted net profit 200,000
Part B:
(a). Calculate the detailed variances for each element of cost and total cost variances:
I. Direct material variance:
Actual price per unit = 585,600 : 122,000 = £4.8
Price variance = (actual price – standard price) x total quantity used
= (4.8 - 5) x 122,000 = £24,400 (F)
This indicates a saving of £24,400, given the actual material cost per unit was lower than the
standard cost per unit. This was favourable (F) to profit.

4
Usage variance = (total actual quantity used – standard quantity for actual production) x
standard price
= (122,000 - 119,000) x 5 = £15,000 (A)
Standard quantity for actual production = 7 x 17,000 = 119,000 meters
In producing 17,000 units, XYZ Ltd should have used 119,000 meters (7 meters x 17,000
units), instead of 122,000 meters. If this extra usage is valued at the standard cost, there is an
adverse usage variance of £15,000 (3,000 meters x £5).
Total variance = Price variance + Usage variance
= 24,400 (F) + 15,000 (A) = £9,400 (F)
The £9,400 favourable total variance . This variance might have arisen because XYZ Ltd
purchased cheaper materials. If this were the case then it probably resulted in a greater wastage
of materials, perhaps because the materials were of an inferior quality.
II. Direct labour variances:
Actual hourly rate = £251,680 : 24,200 DLH = £10.4/DLH
Rate variance = (actual hourly rate – standard hourly rate) x actual hours worked
= (10.4 - 10) x 24,200 = £9,680 (A)
The difference between the actual and standard hourly rates (£0.4 higher) resulted in an adverse
variance of £9,600 in total.
Efficiency variance = (actual hours worked – standard hours for actual production) x
standard hourly rate
= (24,200 - 25,500) x 10 = £13,000 (F)
Standard hours for actual production = 1.5 x 17,000 = 25,500 DLH
The difference between actual hours and standard hours (1,300 DLH) can be valued at the
standard hourly rate of £10, resulting in a favourable variance of £13,000. The favourable
efficiency variance has arisen because the 17,000 units took less time to produce than the
budget allowed for
Total variances = Rate variance + Efficiency variance
= 9,680 (A) + 13,000 (F) = £3,320 (F)
The £3,320 total favourable variance . It arises because the company paid less per direct labour
hour than had been budgeted. This variance could have been caused by using a lower grade of
labour than had been intended. Fortunately, the lower labour rate per hour did not change the
production quality.