AYS Computers, Inc.

2009

AYS Computers, Inc.

By spring 2009, AYS Computers, the leader in computer assembly industry, had nearly eight
years experience assembling and selling desktop computers and laptops in Nagpur and had
grown its market share to a sizeable 22%.

In the current scenario, the profit margin are going down as more and more new players are
entering the computer assembly market. Therefore to increase the top line and the bottom-line
company is attempting to reduce the costs. The company uses standard costing system and the
actual figures of direct material, direct labor and overheads have been obtained. AYS
Computer’s chief financial officer and Vice President (Cost Department) are analyzing the
reports to find the difference between the standard costs and actual costs. The reports have to
be evaluated, reasons for occurrence of variances are to be found and corrective measures are
to be taken to overcome the variances.

Company Background

The company AYS was started in 1995 by Yash Saxena (M.D. of AYS Computers now) an
alumnus of IMT Ghaziabad 1991-93 batch. After completion of his M.B.A from IMT in Finance
and IT, he joined HCL Limited in Delhi. After working with HCL for two years he came back to his
hometown Nagpur and incorporated a company named AYS. The initial business of the
company was to sell typewriter and fax machines. With the advancement of technology and
computer prices dropping down in early 2000, Yash thought of shifting his business to computer
assembly.

On 1 April 2001, AYS was restructured to AYS Computers, Incorporated. In 2006 when desktop
market was shrinking and people preferred laptops, Yash introduced laptops also to his
companies product mix.

Currently AYS Computers have a huge showroom at the Poonam Chambers, Burdy, Nagpur. It
also owns a warehouse in the basement of the building where the assembling of parts take
place and finished product are stored.

Benefits

1) Location: Talking in terms of location, AYS Computers perfectly located in one of the
most visited shopping destinations in Nagpur ie Poonam Chambers.
2) Efficient Sales Force: Company comprises of sales people who come from diversified
background and have useful experience in sales and marketing.

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3) Goodwill: Since AYS Computers is an old company and is in operation since 2001 in
computer assembly business, it has a strong and loyal customer base.

Disadvantages

1) Rise in Competition: With growing advancement in technology and increasing demand

of computers in every field now many new players have entered eating the market
share of AYS.
2) Increase in overall costs: With rise in inflation, cost of labor and other expenses are
estimated to increase in future.

The cost figures of the company for the month of March 2009 are as follows:

Exhibit 1

Standard cost per unit:

Product Desktop Laptop

Direct Materials Rs. 7000 Rs. 14000
Direct Wages Rs. 3000 Rs. 5000
Fixed Overheads Rs. 2000 Rs. 3000

Exhibit 2

No. of units processed/ in process:

Desktop Laptop

Beginning of month: All material applied and 50% 40 120

complete in respect of labor and overheads
End of month: All material applied and 80% complete in 80 120
respect of labor and overheads
Units completed and transferred to warehouse during 160 200
the month

Exhibit 3

Other costs incurred:

1) Direct material purchased at standard price amounts to Rs.20,00,000 actual cost of

which is Rs. 22,00,000.
2) Direct material used for consumption at standard price amounts to Rs.61,00,000.
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3) Direct wages for actual hours worked at standard wage rate were Rs.25,20,000 and
actual wage rates were Rs.24,95,000.
4) Fixed overheads budgeted were Rs.15,35,000 and actual fixed overheads incurred were
Rs.15,50,000.

Required: Calculate

1) Direct material price variance and direct material usage variance.

2) Direct wage rate variance and direct labor efficiency variance.
3) Fixed overhead volume variance and fixed overhead expenditure variance.

Interpret the results.

SOLUTION
Statement showing equivalent production

Output Equivalent
production
Items Units Material Labor and
Overhead
Units % of Units % of
completion completion
Desktop:
Units completed 160 160 100% 160 100%
Closing WIP 80 80 100% 64 80%
TOTAL 240 240 224

Laptop:
Units completed 200 200 100% 200 100%
Closing WIP 120 120 100% 96 80%
Total 320 320 296

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Direct Materials:

Particulars SP*SQ SP*AQ (given) AP*AQ (given)

Desktop 16,80,000 _ _
Laptop 44,80,000 _ _
Total 61,60,000 61,00,000 67,10,000

Direct Labor:

Particulars SR*SH SR*AH AR*AH

Desktop 6,72,000 _ _
Laptop 14,80,000 _ _
Total 21,52,000 25,20,000 24,95,000

Fixed Overheads:

Particulars Fixed overhead Budgeted fixed Actual fixed

charged to production overheads overheads
Desktop 4,48,000 _ _
Laptop 8,88,000 _ _
Total 13,36,000 15,35,000 15,50,000

Calculation of Variances
1) Direct material price variance= (SP-AP)*AQ
= (61,00,000-67,10,000)
= 6,10,000 (A)
2) Direct material usage variance= SP*(SQ-AQ)
= (61,60,000-61,00,000)
= 60,000 (F)
3) Direct wage rate variance= (SR-AR)*AH
= (25,20,000-24,95,000)
= 25000 (F)
4) Labor efficiency variance= SR*(SH-AH)
= (21,52,000-25,20,000)
=3,68,000 (A)
5) Fixed overhead volume variance= (13,36,000-15,35,000)

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= 1,99,000 (A)
6) Fixed overhead expenditure variance= (15,35,000-15,50,000)
= 15000 (A).