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Riki Ltd, produces and sells one product only. The standard cost and
price for one unit being as follows:
$
Direct material A – 10 kilograms at $12 per kg 120
Direct material B – 6 kilograms at $5 per kg 30
Direct wages – 5 hours at $8 per hour 40
Fixed production overhead 60
Total standard cost 250
Standard gross profit 50
––––––
Standard selling price 300
––––––
The fixed production overhead included in the standard cost is based on
an expected monthly output of 750 units. Riki Ltd use an absorption
costing system.
During April the actual results were as follows:
$
Sales 700 units @ $320 224,000
Direct materials:
A: 7,500 Kg 91,500
B: 3,500 Kg 20,300
Direct wages 3,400 hours 27,880
Fixed production overhead 37,000
––––––
176,680
––––––
Gross profit 47,320
Note: Riki Ltd does not hold any inventories.Sir, here I am confused what is the budgeted quantity and what is the actual quantity? Because as per the answer for Material usage variance they are taking 700 as SQ and for sales volume variance they are taking 750 units*hours as BQ . I am confused , please guide
For the sale volume variance we compare actual sales (700) with budget sales (750).
For the cost variances we compare the actual costs for the actual quantity (700) with the standard costs for the actual quantity (700)
I do suggest that you watch my free lectures on basic variances. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Okay sir, I will watch, Thank you.
Also I have one more question :Chapel Ltd manufactures a chemical protective called Rustnot. The
following standard costs apply for the production of 100 cylinders:
$
Materials 500 kgs @ $0.80 per kg 400
Labour 20 hours @ $1.50 per hour 30
Fixed overheads 20 hours @ $1.00 per hour 20
450
The monthly production/sales budget is 10,000 cylinders.
Selling price = $6 per cylinderHere we have calculate as per Marginal costing , the contribution and as per answer it is 1.7 however I am unable to understand the reason that how and why have they cal that as fixed OH should not be included in MC
Marginal cost means variable cost, and the definition of contribution is that it is selling price less variable costs.
Fixed overheads are never relevant in calculating the marginal cost or the contribution.So can you please let me know how in the question did they calculated 1.7 as contribution ?
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