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Please help me with this question.
A company produces units that should take 1.5 hours to make. The standard rate of pay is $15 per hour. Idle time is expected to be 10% of hours paid. They actually produce 20,000 units. They paid $520,000 for 38,000 hours, of which 3,000 hours is idle. What is the labour efficiency variance ( to the nearest $)?
You need to watch the free lecture on advanced idle time variances!
They worked 35,000 hours, but they should have worked 30,000 hours (20,000 x 1.5).
So they have worked 5,000 hours more than they should have done.The standard work rate of pay is 15 / 0.9 = $16.67 per hour
So the variance = 5,000 x 15/0.9 = $83,333 adverse
Referring to chapter 14 – test (qn 2) in the OT notes (pg104)….i did not understand why you multiplied 100/90 in the answer to get the efficiency variance. it said already 3000 hours were idle so these were already deducted from the 38000 actual hours paid? i cant seem to connect that point in the question which says : “idle time is expected to be 10% of hours paid”, as it also says “they pay $520000 of which 3000 hours are idle.” – my point is isnt the 3000 hours idle already covering the idle time hence deducted.
please explain why you multiplied that 100/90 to “(35000-3000)*15”
i have gone through the lecture but i don’t seem to get this part
They actually worked 38,000 – 3,000 = 35,000 hours
The standard time for the actual production = 20,000 units x 1.5 hours = 30,000 hours.So they were inefficient and took 5,000 hours longer to actually make the units then they should have done.
With regard to the costing of these hours, for every 100 hours that they pay they expect 10 hours to be idle and therefore to only work 90 hours.
Or, putting it the other way round, for every 90 hours they work, they expect to pay for 100 hours at at standard rate of $15 per hour. So the standard cost of working 90 hours is $1,500. Therefore the standard cost for each hour worked is 1500/90.As always, the efficiency variance is costed at the standard cost per hour, so the total variance = 5,000 hours x 1500/90 = $83,333 adverse.
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