Question 3 of 7: Standard-Cost Variances & Cash Budgeting

Question 3: Standard-Cost Variances & Cash Budgeting (28 marks, alternative to Question 2)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

Part (a) — Tao Industries standard-cost variances

Given. Standards per unit: DM 0.25 lb @ $40/lb; DL 0.03 hr @ $18/hr. August actuals for 8,000 units produced/sold: 1,900 lb DM @ $41/lb average; 250 DL hours @ $18.25/hr average.

Find. Total, price, and quantity variances for direct material; total, rate, and efficiency variances for direct labor.

Approach. Scale each standard to the 8,000 units actually produced (standard quantity allowed), then split each total variance into a price/rate component (quantity held at standard) and a quantity/efficiency component (price held at standard) so the two sum back to the total.

1. (a) Total direct material cost variance. $$(AQ\times AP)-(SQ\times SP)=(1{,}900\times41)-(2{,}000\times40)=77{,}900-80{,}000=\boxed{\$2{,}100\ \text{F}}.$$
2. (b) Direct material price variance. $$AQ(AP-SP)=1{,}900(41-40)=\boxed{\$1{,}900\ \text{U}}\ \text{(paid \$1/lb above standard)}.$$
3. (c) Direct material quantity variance. $$SP(AQ-SQ)=40(1{,}900-2{,}000)=\boxed{\$4{,}000\ \text{F}}\ \text{(used 100 lb less than standard allowed)}.$$ Check: $1{,}900\ \text{U}+4{,}000\ \text{F}=2{,}100\ \text{F}$, matching part (a).
4. (d) Total direct labor cost variance. $$(AH\times AR)-(SQ\times SR)=(250\times18.25)-(240\times18)=4{,}562.50-4{,}320=\boxed{\$242.50\ \text{U}}.$$
5. (e) Direct labor rate variance. $$AH(AR-SR)=250(18.25-18)=\boxed{\$62.50\ \text{U}}\ \text{(paid \$0.25/hr above standard)}.$$
6. (f) Direct labor efficiency variance. $$SR(AH-SQ)=18(250-240)=\boxed{\$180\ \text{U}}\ \text{(used 10 hr more than standard allowed).}$$ Check: $62.50\ \text{U}+180\ \text{U}=242.50\ \text{U}$, matching part (d).

Part (b) — Ortega Corporation 4th-quarter cash budget

Given. Monthly sales/purchases Jul–Dec (table below); collections 30% (month of sale, 2% discount)/50% (month after)/15% (two months after)/5% uncollectible; purchases paid 40% in month of purchase, 60% the following month.

Find. Total cash receipts and total cash disbursements for each of October, November and December.

Approach. Each month's receipts draw on three sale-months (that month, the prior month, and the month before that) and each month's disbursements draw on two purchase-months (that month and the prior month); tabulate month-by-month.

1. October cash receipts. $$\underbrace{21{,}000(0.30)(0.98)}_{\text{Oct sale, net of 2\% disc.}}+\underbrace{19{,}000(0.50)}_{\text{Sep sale}}+\underbrace{17{,}000(0.15)}_{\text{Aug sale}}=6{,}174+9{,}500+2{,}550=\boxed{\$18{,}224}.$$
2. November cash receipts. $$24{,}000(0.30)(0.98)+21{,}000(0.50)+19{,}000(0.15)=7{,}056+10{,}500+2{,}850=\boxed{\$20{,}406}.$$
3. December cash receipts. $$30{,}000(0.30)(0.98)+24{,}000(0.50)+21{,}000(0.15)=8{,}820+12{,}000+3{,}150=\boxed{\$23{,}970}.$$ The 5% uncollectible portion of each month's sales is never budgeted as a receipt (it is a bad-debt write-off, not a collection).
4. October–December cash disbursements. $$\text{Oct}=8{,}000(0.40)+7{,}000(0.60)=3{,}200+4{,}200=\boxed{\$7{,}400}$$ $$\text{Nov}=9{,}000(0.40)+8{,}000(0.60)=3{,}600+4{,}800=\boxed{\$8{,}400}$$ $$\text{Dec}=10{,}000(0.40)+9{,}000(0.60)=4{,}000+5{,}400=\boxed{\$9{,}400}$$