CIMA P1 Exam Surgery
Past Paper Answer – Q27
Q27 HB
Marking scheme
Marks
(a)
Calculation of budgeted profit
Calculation of sales variances
Calculation of material variances
Calculation of labour variances
Calculation of variable overhead variances
Calculation of fixed overhead variances
Actual profit
Format of reconciliation statement
1
2
1
1
2
1
1
2
11
(b)
Treatment of fixed costs
Sales volume profit variance
Fixed overhead volume variance
Sales volume profit variance
Fixed overhead volume variance
(c)
1 mark for each valid point
Financial reporting/matching
Need to include fixed cost for pricing and other long term decisions
1
Max 2
Max 3
2
2
Max 8
2
2
2
6
25
(a) Reconciliation statement
Budgeted profit (W1)
Sales volume contribution variance (W2)
Selling price variance (W3)
Direct material price variance (W4)
Direct material usage variance (W5)
Direct labour rate variance (W6)
Direct labour efficiency variance (W7)
Variable overhead expenditure variance (W8)
Variable overhead efficiency variance (W9)
Fixed overhead expenditure variance (W10)
Actual profit (W11)
$
F
$
A
$
466,000
63,600
36,000
8,100
29,600
21,600
10,800
5,200
2,700
2,000
48,800
130,800
(82,000)
384,000
Workings
1
Budgeted profit
Budgeted sales (10,000 × $180)
Budgeted direct material (10,000 × $86.40)
Budgeted direct labour (10,000 × $22.50)
Budgeted variable overhead (10,000 × $7.50)
Budgeted fixed production overheads
Budgeted profit
$
1,800,000
(864,000)
(225,000)
(75,000)
(170,000)
466,000
2
Sales volume contribution variance
Should have sold
But did sell
Variance in units
× std contribution ($180 – $86.40 – $22.50 – $7.50)
10,000 units
9,000 units
1,000 (A)
×$63.60
$63,600 (A)
3
Selling price variance
9,000 units should have sold for ( × $180)
But did sell for ( × $184)
$
1,620,000
1,656,000
36,000 (F)
4
Materials price variance
74,000 kg should have cost ( × $10.80)
But did cost ( × $11.20)
$
799,200
828,800
29,600 (A)
5
Materials usage variance
9,000 units should have used ( × 8kg)
But did use
Variance in hours
× std cost
72,000 kg
74,000 kg
2,000 (A)
×$10.80
$21,600 (A)
6
Labour rate variance
10,800 hours should have cost ( × $18)
But did cost (×$19)
$
194,400
205,200
10,800 (A)
7
Labour efficiency variance
9,000 units should have taken ( × 1.25hrs)
But did take
Variance in hours
× std cost
11,250 hours
10,800 hours
450 (F)
×$18
$8,100 (F)
8
Variable overhead expenditure variance
10,800 hours should have cost ( × $6)
But did cost
$
64,800
70,000
5,200 (A)
9
Variable overhead efficiency variance
9,000 units should have taken ( × 1.25hrs)
But did take
Variance in hours
× std cost
11,250 hours
10,800 hours
450 (F)
×$6
$2,700 (F)
10
Fixed overhead expenditure variance
Fixed overhead should have cost
But did cost
$
170,000
168,000
2,000 (F)
11 Double check to actual profit calculation:
Actual profit
Actual sales (9,000 × $184)
Actual direct material
Actual direct labour
Actual variable overhead
Contribution
Actual fixed production overheads
Actual profit
(b)
(i)
system
$
1,656,000
(828,800)
(205,200)
(70,000)
552,000
(168,000)
384,000
There are two differences between the way that variances are calculated in a marginal costing
And in an absorption costing system.
In marginal costing, fixed costs are not absorbed into product costs and so there are no fixed
cost variances to explain any under or over absorption of overheads. There will, therefore, be
no fixed overhead volume variance. There will, however, be a fixed overhead expenditure
variance which is calculated in exactly the same way as for absorption costing systems.
In marginal costing the sales volume variance in units will be valued at standard contribution
margin and called the sales volume contribution variance. In standard absorption costing
standard profit is used instead of standard contribution.
(b)
(ii)
OAR = budgeted overhead / budgeted level of activity = $170,000 / 10,000 = $17 per unit
Budgeted profit per unit = contribution (W2) less fixed cost per unit = $63.60 – $17 = $46.60
Sales volume profit variance
Should have sold
But did sell
Variance in kg
 profit
72,10,000 units
9,000 units
1,000 units (A)
 $46.60
$46,600 (A)
Fixed overhead volume variance
Budgeted production
Actual production
× OAR per unit ($17.00)
(c)
10,000
9,000
1,000 (A)
× $17
17,000 (A)
Fair share
Fixed production costs are incurred in order to make output. It is therefore 'fair' to charge all output
with a share of these costs.
Requirements for IAS 2
Closing inventory values, include a share of fixed production overhead, and therefore follow the
requirements of the international accounting standard on inventory valuation (IAS 2).
Matching concept
Absorption costing is consistent with the accruals concept as a proportion of the costs of production
are carried forward to be matched against future sales.
Fixed costs have to be recovered to make a profit
A problem with calculating the contribution of various products made by an enterprise is that it may not
be clear whether the contribution earned by each product is enough to cover fixed costs, whereas
by charging fixed overhead to a product it is possible to ascertain whether it is profitable or not. This is
particularly important where fixed production overheads are a large proportion of total production
costs. Not absorbing production would mean that a large portion of expenditure is not accounted for in
unit costs.