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Could you please explain this question
Martin Co developed a new product. It set a standard labour cost based on the expected time to make the first unit of the product, which was 100 minutes. A 90% learning rate is expected to apply, and the budgeted cost per hour of labour time is $12 per hour. This learning rate was not incorporated into the standard.The actual time taken to make the first four units was 350 minutes and the cost was $80.
a) Calculate traditional labour rate and efficiency variances.
b) Re-calculate the labour efficiency variance to take account of the learning rate.
SOLUTION;
a) Labour rate variance
$
Actual labour hours × Actual rate 80
Actual labour hours × Standard rate (350/60) × $12 70
Labour rate variance (adverse) 10
Labour efficiency variance
$
Actual labour hours × Standard rate 70
Standard hours for actual production × Standard rate
Standard hours for actual production × Standard rate (4 units × 100 minutes) × $12/60 80
Labour efficiency variance (favourable) 10
(b) Re-calculated labour efficiency variance
Actual labour hours × Standard rate 70
Standard hours for actual production × Standard rate
(working) 324 minutes × $12/60 65
Labour efficiency variance (adverse) 5
WORKINGStandard hours for actual production, taking into account the learning rate of 90%:
Output (units) Cumulative average time Total time
1 100 100
2 90 180
4 81 324It’s labour variances with learning curve…
Let’s break down the question and calculate the required variances step by step.a) Traditional Labour Rate and Efficiency Variances
1. Calculate the standard time and cost:
Standard time for the first unit = 100 minutes
Standard cost per hour = $12
Standard cost per minute = $12 / 60 = $0.20 per minute2. Calculate the standard time for 4 units:
Since the learning rate was not incorporated, the standard time for each unit is assumed to be the same.
Standard time for 4 units = 4 units * 100 minutes/unit = 400 minutes
3. Calculate the actual time and cost:Actual time for 4 units = 350 minutes
Actual cost = $804. Calculate the traditional labour rate variance:
Standard cost for actual time = 350 minutes * $0.20/minute = $70
Labour rate variance = Actual cost – Standard cost for actual time
Labour rate variance = $80 – $70 = $10 Adverse5. Calculate the traditional labour efficiency variance:
Standard cost for standard time = 400 minutes * $0.20/minute = $80
Labour efficiency variance = Standard cost for standard time – Standard cost for actual time
Labour efficiency variance = $80 – $70 = $10 FavourablePart b
You have to solve the learning curve
Calculate the cumulative average time per unit for 4 units
Taking into account the learning rate of 90%:
Which is 324 (below)
Therefore the:Actual labour hours × Standard rate: $70
Standard hours for actual production × Standard rate: 324 minutes × $12 / 60 = $65
Labour efficiency variance (adverse): $70 – $65 = $5 AdverseStandard hours for actual production, taking into account the learning rate of 90%:
Output Cumul ave time (min) Total time (min)
1 100 100
2 90 180 Which is 90%…then total time for 2
4 81 324. And again…then total time for 4Hi
Here, I am little bit confused about two things.
1) the question requires us to calculate the variances, which means that we have to give answer in absolute amount. So why did we net off here instead of using actual formula?
2)step 4. Calculate the traditional labour rate variance:Standard cost for actual time = 350 minutes * $0.20/minute = $70
Labour rate variance = Actual cost – Standard cost for actual time
Labour rate variance = $80 – $70 = $10 Adverse
here why we multiply actual min into std labour rate/min instead of 400 std min?The question clearly asks for
a) Calculate traditional labour rate and efficiency variances.
AH AR. $80
Rate $10
AH SR. $70
Effic $10
SH SR $80It’s the same thing
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