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) Labour Variance
	SH * SR	AH *AR	AH *SR
Class -I	1000*$12	1300*$23	1300*$12
Class -II	1000*$22	1100*$28	1100*$22
Class -III	1000*$26	750*$14	750*$26
	$                  60,000	$          71,200	$          59,300
Direct Labour Rate Variance   = (SR * AH)- (AR * AH)
	$ 59,300 - $ 71,200
	$                -11,900	Unfavorable
Direct Labour Efficiency Variance   = ( SH *SR) - (AH * AR)
		$ 60,000 - $ 71,200
		$         -11,200	Unfavourable
b) Advantages:
1. Effective Negotions by Labour Unions.
2. Hiring of Skill Labour , Semi Skill labour within Budget.
3. Organization will Achieve Planned cost of Labour
4.Organization will Focus on other labour Varaince, Since Rate variance will become nil.
Disadvantages
1. No Motivation for Employees since there is no change in rate per hour.
2. There is a High chance to Labour Turnover because no hikes in theit rate.
3. Due to   restriction on Budget , Management will hire Unskilled Labour for Low rates.