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Hi John,
Can you please show a solution to this question?
The following variances have been calculated in respect of a new product:
Direct labour efficiency $14,700F
Direct labour rate $5,250AThe variances were calculated using standard cost data which showed that each unit of the product was expected to take 8 hours to produce at a cost of $15 per hour. Actual output of the product was 560 units and the actual time worked in the manufacture of the product totalled 3,500 hours at a cost of $57,750.
However, the production manager now realises that the standard time of 8 hours per unit was the time taken to produce the first unit and that a learning curve rate of 90% should have been anticipated for the first 600 units.
Required:
Calculate planning and operational variances following the recognition of the learning curve effect.Explain the importance of learning curves in the context of target costing.
Sorry, but we cannot on here give complete answers to complete questions – we have our normal work to do and we are trying here to help people with problems.
If you say which part is causing you a problem then I will try and help you with pleasure.
Sorry. I calculated the extra hours using the learning curve to be 2.46hrs. I am stucked trying to work out the planning and operational variance parts. I worked out the planning variance to be as follows:
Original budget: 67,200
Revised budget: 87,920
Therefore 20,720ANot sure if that is correct but im stuck here.
OK – I will try 🙂
First of all, there is no mention of planning to change the rate per hour, and so the labour rate variance is all an operational variance. Also, using the ‘normal’ total efficiency variance you can check and find that the budgeted production was the same as the actual production, which is 560 units (if you need me to show the check of this then let me know).
So all we are concerned with is how many hours did we originally budget (560 x 8 = 4480 hours); how many hours should be have budgeted (which we need to calculate using the learning curve); and how many hours did we actually work (3500 hours).
For the learning curve, b = log 0.9/log 2 = – 0.1520 (although almost certainly b will be given you in the exam).
We need the total time for 560 units (the production). The average time is 8 x 560^-0.1520 = 3.0575 hours, and so the total time for 560 units should have been 560 x 3.0575 = 1712 hours.So…….since the revised hours should have been 1712 as against the original budget of 4480 hours, the planning variance is (4480 – 1712) x $15 per hour = $41520 (F)
Since the actual hours were a lot more, the operational variance is (3500 – 1712) x $15 per hour = $26820 (A)
(I am a bit puzzled where you got 2.46 hours from. I have been teaching all day and so I am tired and therefore I may have made an arithmetic mistake (although I do not think so 🙂 ). If I have then please do shout 🙂 )
Lol. I am a total mess right now. I calculated the average time for 600 and 599 units, then subtract the total time for both to arrive at the total time for 600 (2.46hrs), therefore i thought the revised cost was 10.4hrs * $15. Is the anticipated 600 units irrelevant?
I calculated the total efficiency variance to be as follows:
Budgeted hrs (560*8) 4480
Actual hrs 3500
980*15=$14,700FIs this what you were talking about in paragraph one?
The 600 units is not relevant here because we are only actually producing 560.
So……the learning will continue for all 560 units, and what we are after is the total time for all 560 (not the time for the 560th or for any one particular unit).
If we were actually producing (say) 700 units, then we would have a bit more work. We could work out the total time for the 600 (for which learning is occurring) and then we would have to add on the time for another 100 units – each of the 100 taking the same time as the 600th unit. However, since again we are only producing 560, this is not relevant.
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