Question

Worldwide Credit Card Inc. uses standards to control the labour time involved in opening mail from cardholders and recording the enclosed remittances. Incoming mail is gathered into batches, and a standard time is set for opening and recording each batch. The labour standards relating to one batch are as follows:

	Standard Hours	Standard Rate	Standard Cost
Per batch	2.5	$12.00	$30.00

The record showing the time spent last week in opening batches of mail has been misplaced. However, the batch supervisor recalls that 168 batches were received and opened during the week, and the controller recalls the following variance data relating to these batches:

Total labour variance: $660 U

Labour rate variance: $300 F

 

Required

1. Determine the number of actual labour-hours spent opening batches during the week. 

Answer 1

If the total variance is $660 unfavourable, and if the rate variance is $300 favourable, then the efficiency variance must be $960 unfavourable, since the rate and efficiency variances taken together always equal the total variance.

Knowing that the efficiency variance is $960 unfavourable, one approach to the solution would be:

Efficiency Variance = SR (AH – SH)

$12 per hour (AH – 420 hours*) = $960 U

$12 per hour × AH – $5,040 = $960**

$12 per hour × AH = $6,000

AH = 500 hours

 

*168 batches × 2.5 hours per batch = 420 hours

*When used with the formula, unfavourable variances are positive and favourable variances are negative.

The number of actual labour-hours spent opening batches during the week is 500 hours.