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Labour Variances - Answers

Labour Variances - Answers. Questions 1 & 2. Question 1. General info 12100 units produced 54900 hours taken Cost £410200 Std time – 4.5 hrs per unit Std Rate - £7.30 per hour. Total labour cost variance. This looks and compares two sets of data:

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Labour Variances - Answers

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  1. Labour Variances - Answers Questions 1 & 2

  2. Question 1 • General info • 12100 units produced • 54900 hours taken • Cost £410200 • Std time – 4.5 hrs per unit • Std Rate - £7.30 per hour

  3. Total labour cost variance • This looks and compares two sets of data: • In TOTAL how much should labour have cost us for the production we made (as indicated by the standard)? • In TOTAL how much did labour actually cost us for the production we made? • Adverse = Actual higher than std • Favourable = Actual less than std

  4. Total Labour Cost variance • Std • 12100 x 4.5 x £7.30 = £397485 • Actual = £410200 • Variance = £12715 ADVERSE as our total labour cost was more than std

  5. Labour Total Variance • This can only happen because of one of two reasons (or a combination of both) • Reason 1 – We paid labour at a rate different from standard • Reason 2 – We worked for a longer or shorter period on production (different from standard)

  6. Reason 1 – Labour rate variance • Reason 1 – We paid labour at a rate different from standard • This looks and compares two sets of data: • How much should the labour we used have cost us (as indicated by the standard)? • How much did the labour we used actually cost us? • Adverse = Actual higher than std • Favourable = Actual less than std

  7. Labour Rate Variance • Std • 54900 x £7.30 = £400770 • Actual = £410200 • Variance = £9430 ADVERSE as we paid more per for labour per hr than std • What did we pay per hr? • £410200/54900hr = £7.47

  8. Reason 2 – Labour efficiency variance • Reason 2 – We worked for a longer or shorter period on production (different from standard) • This looks and compares two sets of data: • How long should we have worked for the production we made(as indicated by the standard)? • How long did it actually take for the production we made? • This is a variance worked out in hours as we look at usage and therefore has to be converted to monetary amounts (£)

  9. Labour Efficiency Variance • Std • 12100 x 4.5 hrs = 54450 hrs • Actual = 54900 hrs • Variance = 450 hrs ADVERSE as we used more hrs than std • To complete the variance:- • 450 hrs x £7.30 = £3285 ADVERSE • How many hrs did we take per unit? • 54900hrs/12100units = 4.54hrs

  10. Putting the variances together • Total labour cost variance of £12715 ADVERSE can be subdivided into:- • Labour Rate Variance of £9430 ADVERSE (paid a rate higher than standard) • Labour Efficiency Variance of £3285 ADVERSE (took longer than standard) • (£9430)+(£3285) = ( £12715)

  11. Putting the variances together • Total labour cost variance can be subdivided into:- • Labour Rate Variance • Labour Usage Variance

  12. Give 3 reasons why we may have:- • Paid a price for labour higher than standard • Took longer to produce a unit than set by the standard

  13. Causes of labour cost variances

  14. Question 2 • General info • 11400 units produced • 34700 hours taken • Cost £316400 • Std time – 3 hrs per unit • Std Rate - £9 per hour

  15. Total Labour Cost variance • Std • 11400 x 3 x £9 = £307800 • Actual = £316400 • Variance = £8600 ADVERSE as our total labour cost was more than std

  16. Labour Rate Variance • Std • 34700 x £9 = £312300 • Actual = £316400 • Variance = £4100 ADVERSE as we paid more per for labour per hr than std • What did we pay per hr? • £316400/34700hr = £9.12

  17. Labour Efficiency Variance • Std • 11400 x 3 hrs = 34200 hrs • Actual = 34700 hrs • Variance = 500 hrs ADVERSE as we used more hrs than std • To complete the variance:- • 500 hrs x £9 = £4500 ADVERSE • How many hrs did we take per unit? • 34700hrs/11400units = 3.04hrs

  18. Labour Variances Settings standards and reasons for the variances…

  19. Setting labour variances should include:- • Seasonality • Forseen changes • Efficiency data • Skill of labour force

  20. Adverse or Favourable Labour Variances? • Better quality material • Poorer quality material • Labour rate increase • Labour rate decrease • Unskilled workers • More waste • Improved efficiency • Machine problems • New machines

  21. Better quality material – favourable efficiency Poorer quality material – adverse efficiency Labour rate increase – adverse rate Labour rate decrease – favourable rate Unskilled workers – favourable rate, adverse efficiency More waste – adverse efficiency Improved efficiency – favourable efficiency Machine problems – adverse efficiency New machines – adverse efficiency leading to favourable efficiency

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