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If a question provides enough information to calculate both planning and operational efficiency variances and we are ask to calculate the “labour efficiency variance”, what exactly are they asking?
Does this mean we simply compare the actual hours against the original budget hours at standard cost?
Looks silly, but I’m just slightly confused because I’ve come across tricky questions where calculating planning/operational variance (without the examiner explicitly asking this) were prerequisites to the final answer.
2.
Zest Co is analysing data for the month where the company was expecting the average level of idle time to be 20% of the hours paid. The 90% learning curve arose only for the first 400 units and in month three when a steady state was reached. When units 401-650 were produced, the company paid for 5,250 hours and the workforce worked 4,500 hours.
What was the labour efficiency variance?
I calculated total time for 401 units and deducted time for 400 units to get time taken to make the 401st unit (14hrs) since this was when steady state was reached and will be the minimum time taken to make the other 250 units thereafter.
But the answer used the average time for 400 units 16.09hrs as the standard time. Why? please.
Firstly, the labour efficiency variance is never calculated by comparing actual hours with budget hours!! We compare the actual hours with the standard hours for the actual production.
Secondly, if the examiner wants you to split it between planning and efficiency then the examiner will either ask for them specifically, or (unlikely these days, but possibly if it is a section C question) will ask for the variances ‘in as much detail as possible’ and will give information enabling you to split the variances.
With regard to your Zest question, from what you have typed, it would seem that they should have used the time for the 400th unit (which is the total time for 400 units less the total time for 399 units).
However I really need to see the full question to be sure that you have interpreted it properly. If it is a past exam question or a question from the BPP Revision Kit then tell me which one and I will be able to check.
First question is sorted. Thanks.
Second question is a section B style question and here goes;
Zest Co has just completed the first three months of producing the Zest and is considering performing some labour variance analysis. The standard cost per Zest for labour (@$5/hour) is $200.
Zest Co is analysing data for month 3, when the company was expecting the average level of idle time to be 20% of the hours paid. The 90% learning curve arose only for the first 400 units and in month three when a steady state is then achieved. When units 401-650 were produced, the company paid for 5,250 hours and the workforce worked 4,500 hours.
I only have issues with calculating the labour efficiency variance.
The question is not complete (or you have not typed it correctly).
It depends on how many units were actually produced in month 3.
If they produced a total of 650, then the total time for the first 400 will be 400 multiplied by the average time per unit, which is 16.09 hours.
The total time for the next 250 will be 250 multiplied by the time for the 400th unit, which is 13.64 hours.(It does seem more like a Section C question than a Section B style question 🙂 )
I thought as much because that’s all there is. It’s a Kaplan Kit question.
Thanks, Sir
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