Problem:
Variance analysis and reconciliation of budgeted and actual profit
The Perseus Co. Ltd, a medium-sized company, produces a single produce in its one overseas factory. For control purposes, a standard costing system was recently introduced and is now in operation.
The standards set for the month of May were as follows:
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Production and sales
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Selling price (per unit)
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£140
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Materials
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Material 007
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6 kilos per unit at
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£12.25 per kilo
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Material XL90
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3 kilos per unit at
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£3.20 per kilo
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Labour
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4.5 hours per unit at
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£8.40 per hour
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Overheads (all fixed) at £86 400 per month are not absorbed into the product costs.
The actual data for the month of May, are as follows:
Produced 15 400 units, which were sold at £138.25 each.
Materials
Used 98 560 kilos of material 007 at a total cost of £1 256 640
Used 42 350 kilos of material XL90 at a total cost of £132 979
Labour
Paid an actual rate of £8.65 per hour to the labour force. The total amount paid out amounted to £612 766
Overheads (all fixed) £96 840
Required:
(a) Prepare a standard costing profit statement, and a profit statement based on actual for the month of May.
(b) Prepare a statement of the variances which reconcile the actual with the standard profit or loss .
(c) Explain briefly the possible reasons for inter-relationships between material variances and labour variances.