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Hello, Sir!
Could you explaing how they get 90% step by step, please?
The answer which is given by BPP writers isn’t so clear.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 budgeted time per unit is (42 + 37 + 11) / 60 = 1.5 hours.
They budgeted on working 120,000 x 1.5 = 180,000
The budgeted on paying (i.e. clock hours) 500 x 400 = 200,000
They were therefore budgeting on there being 20 hours of idle time, which is 20,000/200,000 = 10% of the hours paid, so 90% of the time is worked.Given that they actually paid for 215,000 hours, they will have expected to work for 90% x 215,000 = 193,500 hours.
I am guessing that you found this in the Study Text rather than in the Revision Kit, because I would be amazed if this were to be asked in the exam 🙂
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