26 Jan 2010
Sample Essay: Basic Variances
| Selling price | 120 | ||
| Units | Price | ||
| Direct material A | 5 kgs | 12.5 | |
| Direct material B | 10 kgs | 40 | |
| Direct Wages | 3 hrs | 18 | |
| Variable Overhead | 3 hrs | 9 | |
| Fixed Overhead | 3 hrs | 15 | |
| Profit per unit | 25.5 | ||
| Aug-08 | units | amount | |
| Sales | 1050 | 138600 | |
| Production costs | 1050 | ||
| Direct material A | 5670 | 14742 | |
| Direct material B | 10460 | 38179 | |
| Direct Wages | 3215 | 19933 | |
| Variable Overhead | 10288 | ||
| Fixed Overhead | 15432 | ||
| August operation | ||
| Actual costs | ||
| Sales/unit | 132 | |
| Direct material A | 13 | |
| Direct material B | 36.5 | |
| Direct Wages | 18.6 | |
| Variable Overhead | 9.798095 | |
| Fixed Overhead | 14.69714 | |
| This were the actual costs associated | ||
| with each item that resulted from the | ||
| production | ||
Changes in the Material A due to the small amount can be reasonably explained by losses within the production system. The changes in the Material B that is at a considerable level can be attributed to theft or price reduction from the supplier. The amounts reflected are naturally assumed to have been computed using the absorption costing. The direct wages small changes can be attributed to the changes with the production staff for very minute amounts of time. It can be lateness or absenteeism of the employees concerned.
| Sales | 1386000 | |
| revenues | ||
| Direct material A | 73710 | |
| Direct material B | 381790 | |
| Direct Wages | 59799 | |
| Variable Overhead | 10279.5 | |
| Fixed Overhead | 15432 | |
| Total Costs | 541010.5 | |
| Gross Margin | 844989.5 | |
| Gross Margin % | 60.966053 | |
| under absorption costing | ||
| Profit per unit | 804.7519 | |
The resulting figures are the result of the company’s operation in actual situation for the month of August. The changes in the profit per unit are mainly due to the change in the number of inventories that were also produced. It can be that the inventories have increased or the overhead fixed costs have reduced or a combination of both. They are both capable of bringing down the costs associated with the production of each unit. As a final result the profit margin will naturally increase of course.
References:
Revsine et al, (2004), “Financial Reporting and Analysis”