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John Moffat.
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Arshi-16
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kaplan exam kit pg no:253.Ans 171 why $10 is taken as per hour standard labour rate?
John Moffat
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I do not have the Kaplan Exam Kit (only the BPP Revision Kit).
If it is labelled as being a past exam question then tell me the name of it (and the date of the exam) because I do have all past exam questions.
Arshi-16
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Q) When considering setting standards for costing, which of the following would NOT be
appropriate?
A The normal level of activity should always be used for absorbing overheads
B Average prices for materials should be used, encompassing any discounts that are
regularly available
C The labour rate used will be the rate at which the labour is paid
D Average material usage should be established based on generally-accepted working
practicesThis is the question
ans) C
The standard labour rate should be the expected rate/hour, but allowing for standard levels
of idle time. For example, if the work force is paid $9 per hour but idle time of 10% is
expected, the standard labour rate will be $10 per hour ,not $9And this is the answer
My doubt is that why they take $10?
John Moffat
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On the standard cost card, for labour we take the hours worked per unit multiplied by the labour cost per hour.
However, we need to use the cost per hour for hours actually worked.
Here is a different example. Each unit takes 9 hour to make. 10% of the hours paid are idle. Labour is paid at the rate of $18 per hour.
Because 10% of the hours paid are idle, it means that only 90% of the hours paid for are actually working hours.
Therefore, to have 9 working hours we need to pay for 9/90% = 10 hours. (We pay for 10 hours, 1 hours is idle and so 9 hours are actually working).
Therefore the cost of the 9 working hours means paying for 10 hours at $18 per hour which is $180. So the cost of each working hour is 180/9 = $20.
(and on the cost card we would show labour as being 9 hours at $20 per hour = $180 per unit).
It might help you to watch my lecture on Advanced Idle Time Variances. They are not often asked in the exam, but the same problem (with calculations) arises 🙂
(The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well 🙂 )
Arshi-16
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