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What does 90% mean in the labour efficiency variance answer of this question?
Question
XYZ Co is planning to make 120,000 units per period of a new product. The following standards have been set.
Per unit
Direct material A 1.2 kg at $11 per kg
Direct material B 4.7 kg at $6 per kg
Direct labour:
Operation 1 42 minutes
Operation 2 37 minutes
Operation 3 11 minutesOverheads are absorbed at the rate of $30 per labour hour. All direct operatives are paid at the rate of $8 per hour. Attainable work hours are less than clock hours, so the 500 direct operatives have been budgeted for 400 hours each in the period.
Actual results for the period were:
Production 126,000 units
Direct labour cost $1.7m for 215,000 clock hours
Material A cost $1.65m for 150,000 kg
Material B cost $3.6m for 590,000 kgAnswer
Labour efficiency variance
126,000 units should take (x 1.5 hrs) 189,000 hrs
but did take (215,000 hrs x 90%) 193,500 hrs
4,500 hrs (A)
Standard rate per hour x $8
$36,000 (A)The total standard time is 42 + 37 + 11 = 90 minutes, which is 1.5 hours per unit.
So the budgeted paid hours were 120,000 x 1.5 = 180,000 hours.But the budgeted actual hours are 500 employees x 400 working hours = 200,000 hours.
So the working hours are budgeted as 180,000/200,000 = 90% of the paid hours.
So since they actually for paid for 215,000 hours, we would have expected them to be working for 90% x 215,000 hours.
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