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  1. avatar says

    Sir, assist me on this:

    A division of a company is capable of making two products – X and Y.
    They can sell both products externally as follows:

                                                    X                Y
    External selling price            80              100
    Variable cost                         60               70

    Contribution per unit            20               30
    Labour hours per unit            5 hours      10 hours

    The company has limited labour hours available, and another division requires product Y.

    What is the minimum transfer price that should be charged by the division in order to achieve goal congruence?

    • Profile photo of John Moffat says

      This question has nothing at all to do with idle time variances!
      You must ask this question in the Paper F5 Ask the Tutor Forum – this space is for comments on the lecture, not for asking questions about other topics.

      (Have you watched the lecture on transfer pricing? If not, then you must, because I work through this very example in the free lecture and you cannot expect me to type out my lecture.)

  2. avatar says

    Sir, is the answer correct?
    Y plc produces widgets.
    Each widget should take 0.5 hours to make. The standard rate of pay is $10 per hour. Idle time is expected to be 5% of hours paid.

    They actually produce 10,800 units. They pay $50,000 for 6,000 hours, of which 330 hours are idle.

    What is the labour efficiency variance?

    Answer:
    10800 units was expected to be produced in 10800*.5= 5400hrs

    But took. 6000hrs
    Efficiency variance= 600hrs

    • Profile photo of John Moffat says

      No. Variances are measured in $’s not in hours!

      Also, for the efficiency variance you compare the standard hours with the hours actually worked. The standard hours are indeed 5400. However they did not work 6,000 hours – they only worked 5670 hours.

      So the efficiency variance is 5670 – 5400 = 270 x $10.526 = $2842 (adverse)

  3. avatar says

    Sir, assist me on this question:

    Y plc produces widgets.
    Each widget should take 0.5 hours to make. The standard rate of pay is $10 per hour. Idle time is expected to be 5% of hours paid.

    They actually produce 10,800 units. They pay $50,000 for 6,000 hours, of which 330 hours are idle.

    What is the excess idle time variance?

    • Profile photo of John Moffat says

      They paid for 60,000 hours and therefore the standard idle time is 5% x 60000 = 300 hours.
      The actual idle time is 330 hours, and therefore there is an excess of 30 hours.

      The standard pay rate is $10 per hour.
      So the standard rate per working hour is 10 / 0.95 = $10.526

      So the idle time variance is 30 x $10.526 = $316 (A)

    • Profile photo of John Moffat says

      Have you downloaded the free Course Notes? (If not then it is pointless watching the lectures – it says above every lecture that it is based on the Course Notes and gives a link to download them)

      If you have downloaded them then you will see in the question “Hours worked: 7740 hours”.

  4. avatar says

    hi very good lecture

    but am just a little confused i know this formula for labour variances:

    actual hour *actual rate = a
    50020
    rate variance = b-a= 46440-50020 =3580(A)
    actual hour * standard rate = b
    7740 * 6 =46440
    efficiency variance = c-b= 45600-46440=840(A)
    standard hour *std rate = c
    7600 * 6 =45600

    can you check my error and tell me plz?

    when i put actual hour=8200 my effeciency variance change plz tell me as soon as possible what is my error?

    thnx for the lecture

      • avatar says

        QUESTION

        A company budgets that each unit will take 7.6 hours to make.

        It budgets on paying workers at the rate of $5.70 per hour,and that 5% of the hours paid for will be idle.

        The actual results(for production of 1000 units)are:

        Hours paid : 8200 hours at a cost of $50020

        Hours worked: 7740 hours

        required:
        the total variance into rate of pay , idle time ,and efficiency variances

      • Profile photo of John Moffat says

        The rate variance is (8200 x 5.70) – 500020 = 3280 (A)

        The efficiency variance is (7740 – (1000 x 7.6)) x 6 = 840 (A)

        The excess idle time variance is ((8200 – 7740) – (5% x 8200)) x 6 = 300 (A)

      • avatar says

        is the formula i used correct or i made an error because i always use this formula and get the right answer but for this one i don’t get it right why?

  5. avatar says

    Dear John,

    I really appreciate your effort with this, Your lecture is very brief and to the point. This has actually given me some knowledge.

    Would you be able to upload a lecture where you would be doing a full exam paper please? A latest one?

    Even we know the scenario and how to do a particular question, I’m finding it difficult to attempt exam questions.

    Your support is highly appreciable.

    Thanks & regards.

    • Profile photo of John Moffat says

      The pay rate is the actual rate that they pay per hour.

      The work rate is the effective cost per working hour.

      work rate = pay rate x std hour paid per unit / std hours worked per unit.

      You use the pay rate when calculating the rate of pay variance

      You use the work rate when calculating the efficiency variance and the excess idle time variance.

      • avatar says

        Hi John,

        Sorry to ‘labour’ the point (no pun intended!) but I’m not clear why the work rate was not required in Chapter 13 Example 1 when we worked out the Idle Time variance and Efficiency variance but it was required for Example 5, chapter 14.
        And..how will we know the difference in the exam?

        Thanks
        Carmel

      • Profile photo of John Moffat says

        The reason is that in the first example no idea time was budgeted for (and therefore all of the idle time was a variance and the ‘work rate’ was the same as the ‘pay rate’.

        In the second example, idle time was budgeted for and therefore we expected the working hours to cost more than the pay rate.

        In the exam, you just have to check whether or not idle time was budgeted for.

  6. Profile photo of Miss A.. says

    Dear Sir, in the above example we have used work rate while calculating labour idle time variance.But what to do if we are not given work of rate or we don’t have enough information in the question to calculate it.Would then we use pay rate while calculating labour idle time variance??

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