Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Price and efficiency variances, journal entries



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15.18 Price and efficiency variances, journal entries.
(30 min)
1


Flexible
budget

Actual costs

(Budgeted input

incurred

Allowed for actual

(Actual input
Actual input
Output achieved

× Actual price)
× Budgeted price
× Budgeted price)
Purchases Usage Direct
(100,000 × €3.10*) (100,000 × €3.00)
(98,073 × €3.00)
(9,810 × 10 × €3.00) materials €310,000
€300,000
€294,219 €294,300


€10,000 U

€81 F
Price variance

Efficiency variance

Direct


(9,810 × 0.5 × €20) or manufacturing
(4,900 × €21**)
(4,900 × €20)
(4,905 × €20) labour €102,900
€98,000
€98,100

€4,900 U
€100 F
Price variance
Efficiency variance

*
* €310,000 ÷ 100,000 = €3.10
** €102,900 ÷ 4,900 = €21
2
Materials Control
€300,000 Direct materials price variance
10,000
Accounts payable or Cash control
€310,000
Work in progress control
€294,300
Materials control
€294,219
Direct materials efficiency variance
81
Work in progress control
€98,100 Direct labour price variance
4,900
Wages payable control
€102,900
Direct labour efficiency variance
100
Note
: Some students comments will be full of conjecture about higher prices for materials, better-quality materials, higher-grade labour, better efficiency in use of materials and soon. A possibility is that approximately the same labour force is taking slightly less time with better materials and causing less waste and spoilage.


Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 A key point in this problem is that all of these efficiency variances are likely to be insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band or a range of acceptable performance rather than a single-figure measure.
3
The purchasing point is where responsibility for price variances is found most often. The production point is where responsibility for efficiency variances is found most often. Drogheda Chemical Ltd may calculate variances at different points in time to tie in with these different responsibility areas.

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