Management Accounting

The variance analysis project is absolutely a tough & tricky question. Here are some things to help you

get going in the right direction:

1. Variance calculations

• Setup / format – I suggest showing separate columns for AQ, AP, SQ, SP, etc. and also separate

rows for amateur and professional. A potential set up would look like this:

• • Direct materials – in point #4, you’re told the total DM variance is $5,040, unfavourable. In

point #3, you’re also told that “direct materials were purchased at the budgeted price of $28 per

kg”. From this you can deduce that AP = SP, and there would be no price variance on materials.

Your entire $5,040 unfavourable materials variance relates to quantity – but you need to figure

out whether that was the amateur or professional model.

• Direct labour – AR and SR are the same for professional and amateur models. There is a

difference between AR and SR, however, so you will see a labour rate variance for. You will also

see an efficiency variance, but only pertaining to one of the two models.

o Check figures – rate variance (total for amateur & pro) = $6,120 unfavourable. Efficiency

variance (total) = $5,040 favourable.

• Variable overhead – similar to labour, there will be an efficiency variance, but only for one

model. In point #8, you are given the total VOH variance of $16,344, favourable. Once you solve

the efficiency variance, you can plug the amount in for rate variance that will give you that total

favourable variance. Then you will need to work backwards to solve the actual rate of variable

overhead (hint: it is the same for both amateur and professional) .

o Check figures – spending variance (total for amateur & pro) = $9,792 favourable.

Efficiency variance (total) = $6,552 favourable.

Materials variances

AQ AP AQ SP SQ SP

Amateur model xx kg $xx xx kg $xx xx kg $xx

Amateur model sub total $XXXX $XXXX $XXXX

Professional model xx kg $xx xx kg $xx xx kg $xx

Professional model subtotal$XXXX $XXXX $XXXX

Total amateur and pro $XXXXX $XXXXX $XXXXX

Price variance $XXX Quantity variance $XXX

U / F U / F

Total direct materials variance $XXX U / F

2. Variance analysis – don’t forget to comment on the variances

3. Standard cost cards

• You will need to know the SQI/SHI and SP/SR for both amateur & professional models. The

standard cost card includes direct materials, direct labour, variable manufacturing overhead.

You will have calculated each of these components in step 1, so you this stage will be just to

accumulate the data together. An example format:

Standard Cost Card - Amateur Model Standard Standard Standard

Production costs per unit: Quantity Price Cost

Direct material -$

Direct labour -$

Variable manufacturing overhead -$

Total production cost per unit -$

Standard Cost Card - Professional Model Standard Standard Standard

Production costs per unit: Quantity Price Cost

Direct material -$

Direct labour -$

Variable manufacturing overhead -$

Total production cost per unit -$