Question

The accountant for Barry Ltd compares each month’s actual results with a monthly plan. The standard direct labour rates and the standard hours allowed, given the actual output in April, are shown in the following schedule: Standard direct labour rate per hour Standard direct labour hours allowed, given April output Labour class III $26.00 1,000 Labour class II $22.00 1,000 Labour class I $12.00 1,000 A new union contract negotiated in March resulted in actual wage rates that differed from the standard rates. The actual direct labour hours worked and the actual direct labour rates per hour for April were as follows. Actual direct labour rate per hour Actual direct labour hours Labour class III $28.00 1,100 Labour class II $23.00 1,300 Labour class I $14.00 750 Required: a) Calculate the following variances for April, indicating whether each is favourable or unfavourable: i direct labour rate variance for each labour class. ii direct labour efficiency variance for each labour class. b) Discuss two advantages and two disadvantages of a standard costing system in which the standard direct labour rates per hour are not changed during the year to reflect events such as a new labour contract. (4 marks, maximum 150 words)

Answer 1

a ) Standard labor rate = $ 26

Standard labor hours = 1000

Actual labor rate = 28

Actual labor hours = 1100

Class III:

i ) Labor rate variance = ( Actual rate - standard rate ) x Actual hours

= ( 28 - 26 ) x 1100

= 2 x 1100

= 2200 Unfavorable.

ii ) Direct labor efficiency variance:

Direct labor efficiency variance = ( Actual hours - standard hours ) x Standard rate

= ( 1100 - 1000 ) x 26

= 100 x 26

= 2600 Unfavorable.

Class II:

i ) Labor rate variance = ( Actual rate - standard rate ) x Actual hours

= ( 23 - 22 ) x 1300

= 1 x 1300

= $ 1300 Unfavorable

ii ) Direct labor efficiency variance = ( Actual hours - standard hours ) x Standard rate = (1,300 - 1,000) * 22 = $6,600 Unfavorable

Class I:

i ) Labor rate variance = ( Actual rate - standard rate ) x Actual hours

= ( 14 - 12 ) x 750

= 2 x 750

= $ 1500 Unfavorable

ii ) Direct labor efficiency variance = ( Actual hours - standard hours ) x Standard rate = (750 - 1,000) * 12 = $3,000 Favorable

b) Advantages of a standard costing system are:

1. Improved cost control Business can gain higher cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances—instances where things did not go as planned.
2. Helpful information for managerial planning and decision making

Disadvantages of a standard costing system are:

1. Controversial materiality limits for variances Determining the materiality limits of the variances can be controversial.

2. Non reporting of certain variances Laborers do not always report all variances.

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