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Hello Mr. Moffat,
I was hopping you can help me with the answer to a question from BPP Practice and Revision Kit.
A standard product takes 0.4 h of direct labour time for which the standard wage rate is $14 per hour. During the most recent month, 8000 units of the product were manufactured and these took 3500 hours to make. It is recognised that the work force had been given a large pay rise to $16.50 per hour, which applied throughput the recent month, but which had not been included in the standard hourly rate.
What is the labour rate planning variance.I did my workings as below:
Original budget: 0.4h x $14
Revised budget: 0.4h x $16.50 (I assumed that the time spent per unit does not change)Revised hours at revised cost (8000u x 0.4=3200h) at $16.50 52800
Revised hours at std cost 3200 at $14 44800
Variance $8000 (A).In BPP the answer is 8750 (A). Am I wrong in assuming that revised budget is 3200h or BPP uses a different method for calculating the variance?
Thank you.
There are two different ways of calculating planning and operational variances, which give different answers!
The examiner has made it clear that both ways will get full marks.The way you have done it is actually the more sensible way.
What BPP have done is use the actual hours of 3500, rather than the revised hours (which is acceptable).Because of the problem of there being two acceptable methods, I do not think it can be asked in Section A of the exam (the MCQ’s).
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