Question on Material Variance


Bidii Company Ltd. Manufactures a single product and uses standard costing. The standard costs for producing one unit of the product are as follows:

Direct material:  
Material X (3Kgs) 30
Material Y (5 Kgs.) 25
Direct labour (5 hours) 40
Production Overheads:  
Variable 30
Fixed 20
Standard unit cost 145

Note: Overhead is applied on basis of direct labour hours.

In the month of May 20X6, the company had budgeted to produce 10,000 units. However, 11,000 units were actually produced and the costs incurred were as follows:

  Shs. Shs.
Material cost:    
Material X (34,000 Kgs.) 323,000  
Material Y (52,000 Kgs) 312,000 635,000
Labour costs (51,000 hours)   433,500
Manufacturing Overheads:    
Variable 340,000  
Fixed 220,000 560,000
Total manufacturing costs   1,628,500

Note: There was no charge in stock of work in progress.


Calculate the following variances indicating whether they are favourable (F) or unfavourable (U):

  1. Material price variance
  2. Material usage variance
  3. Labour rate variance
  4. Labour efficiency variance
  5. Total variable overhead variance
  6. Total fixed overhead variance.

(Total: 20 Marks)


Maputo Ltd. Manufactures and sells one brand of washing soap. The sale price per one dozen packet is Sh.50. The standard production cost is Sh.42.80 per dozen arrived at as follows:

Direct materials: Material A – 3 Kg. @Sh.4 12.00
Material B – 2 litres @ Sh.5 10.00
Direct labour: ½ hour @ Sh.20 10.00
Variable 7.20
Fixed 3.60

Factory overheads are allocated on the basis of machine at the rate of sh.12 per hour. During the last financial year the company had budgeted to produce 72,000 dozen packets. However, material shortages limited production to 64,000 dozen packets for which the following costs were incurred:

Material A 194,000 Kg. 780,800
B 130,000 litres 625,000
Direct labour 35,000 hours 684,000
Variable overheads 384,000
Fixed overheads 250,000

The company utilized 60,000 machine hours


  1. Calculate the following variances:
    1. Material price and usage variance (6 marks)
    2. Labour rate and efficiency variances (4 marks)
    3. Variable overhead spending and efficiency variances. (4 marks)
    4. Fixed overhead volume variance (3 marks)
  1. What is the significance of the fixed overhead volume variance calculated above  (3 marks)

(Total: 20 marks)


Beauty Products Ltd. Are manufactures of a body lotion that is sold to retailers in packages of 24 one-quarter litre bottles. In the month of July, 750 packages were produced and sold. Details regarding production costs are given below:

Sales (750 packages @ Sh.360 each) 270,000
Production costs:  
Direct materials:  
Material A – 15,000 litres @ Sh.1.60 per litre 24,000
Material B – 16,500 litres @ Sh.2.90 per litre 47,850
Labour – 3,200 hours @ Sh.15 per hour 48,000
Overheads 70,000
Gross profit  
Operating expenses  
Packaging costs – 750 packages @ sh.20 15,000
Administrative costs 55,000

Beauty Products had budgeted to produce and sell 1000 packages for the month of July. At this production level they anticipated a net profit of sh.90,500 as shown below:

Sales (1000 packages @ Sh.365 each) 365,000
Production costs:  
Direct materials:  
Material A – 15,000 litres @ Sh.1.50 per litre 22,500
Material B – 16,500 litres @ Sh.3.00 per litre 54,000
Labour – 4,000 hours @ Sh.13.80 per hour 55,200
Overheads: based on 150% labour costs 82,800
Gross profit  
Operating expenses:  
Packaging costs – 1000 packages @ sh.15 15,000
Administrative costs (all fixed) 45,000
NET PROFIT (budgeted) 90,500


  1. Prepare a flexible budget profit and loss statement for the production level achieved for Beauty Products Ltd. For the month of July (6 marks)
  2. Determine the effect (favourable or unfavourable) that the failure to achieve the target sales of 1000 units in July had no budgeted profit for each of the following items show your calculations)
    1. Sales
    2. Materials
    3. Material A and Material B
    4. Labour
    5. Overheads
    6. Packaging material
    7. Administrative costs (12 marks)
  3. Explain briefly TWO other major factors (apart from the failure to achieve target sales) which are causes of the difference between budgeted and actual profit. (Calculations are not necessary) (4 marks)

(Total: 22 marks)


For a product the following data was given:

Standards per unit of product:

Direct material 4 kilogrammes at Sh.0.75 pr kilogramme

Direct labour 2 hours at sh.1.60 per hour

Actual details for a given financial period:

Output produced in units   38,000
Direct materials:   Shs
Purchased 180,000 kilogrammes for 126,000
Issued to production 154,000 kilogrammes  
Direct labour 78,000 hours worked for 136,500

There was no work-in-progress at the beginning or end of the period.

You are required to

  1. Calculate the following variances:
    1. Direct materials costs;
    2. Direct materials price, based on issues to production;
    3. Direct material usage;
    4. Direct wages cost;
    5. Direct wages rate;
    6. Direct labour efficiency;
  2. State whether each of the following cases, the comment given and suggested as the possible reason for the variance, is consistent or inconsistent with the variance you have calculated in your answer to (a) above, supporting each of your conclusions with a brief explanatory comment.

Items in a.

  1. Direct materials price variance; the procurement manager has ignored the economic order quantity and, by obtaining bulk quantities, has purchased material at less that the standard price;
  2. Direct materials usage variance: material losses in production were less than had been allowed for in the standard;
  3. Direct wages rate variance: the union negotiated wage increase was Sh.0.15 per hour lower than expected;
  4. Direct labour efficiency variance: the efficiency of labour was commendable.


Maridadi People Ltd., an exclusive cosmetic business, manufactures a popular perfume, known as Jasho, which it sells in bottles, thorough its retail shops for Sh.2,000. During the latest quarter ending 30 September 20X1, the company budgeted to make a profit of Sh.875,000 before deducting fixed overheads amounting to Sh.400,000. The standard cost per bottle is shown below

Materials - 10 Kg @ Sh.50 per Kg 500
Labour - 10 hours @ Sh.60 per hour 600
Variable factory overheads   200
Marginal cost per bottle   1,300
Fixed factory overheads   320
Total cost per bottle   1,62

Factory overhead costs (variable and fixed) are absorbed into products on the basis of direct labour hours.

Actual results for the quarter as follows:-

Sales - 1,100 bottles 2,365,000
Raw Materials (14,000 Kg)   784,000
Labour (15,000 work hours) 997,500
Variable factory overhead incurred   320,800
Fixed factory overheads incurred   441,700

Production in the quarter amounted to 1300 units. Out of the total raw materials purchased, 2000 Kg. Are still in stock. There were no operating balances of raw materials or finished goods stocks. It is the policy of the company to value all stocks at standard cost.


  1. Calculate the following variances; indicting clearly whether they are favaourable (F) or unfavourable (U): -
    1. Material price and usage.
    2. Labour rate and efficiency
    3. Variable factory overhead over or under absorbed
    4. Sales price and sales margin quantity. (15 marks)
  1. Independently calculate the operating profit variance; and explain its significance.  (3 marks)
  1. Why should management investigate favourable significant variances? (2 marks)

(Total: 20 marks)