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An extract from the standard cost card for product CJ is as follows:
Direct labour (0.5 hours × $12) $6
710 units of CJ were produced in the period and staff worked 378 hours at a total cost of
$4,725. Of these hours 20 were lost due to a material shortage.
What is the labour efficiency variance?
A $516 favourable
B $36 favourable
C $36 adverse
D $516 adverseAns.
C
Standard hours × OAR
710 × 0.5 $12 $4,260
Actual hours × OAR
378 – 20 $12 $4,296
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Efficiency variance $36 AWhere have they got the OAR from ? and why is it even being used here since we are asked to find out the labor efficiency variance. Nothing in the answer given makes sense. Please help.
The $12 is the the standard rate of pay per hour (the answer should not have called it the OAR).
For the efficiency variance we compare the standard hours for the actual production with the actual hours worked, costed out at the standard cost per hour.
Have you watched our free lectures on variance analysis? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you. I have watched the lecture. I had confusion because they referred labor rate as OAR. After reading your explanation, my doubt is clear.
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