Page 143 - P1 Integrated Workbook STUDENT 2018

Advanced variance analysis

Example 3

Jayco produces boxes of earplugs. Details of actual and budgeted production
for the month are:

Budget Actual Standard
Units 1,000 1,100
Labour hours 4,000 4,180 4 hours per unit
Labour costs $60,000 $71,400 $15 per hour
Last month, Jayco introduced a new foam compressing machine which
reduced the time taken for earplug production by 12.5%.

Calculate the labour efficiency variance, splitting it between its planning
and operational elements.

Solution

Planning efficiency variance

Original standard hours = 4 hours × 1,100 units = 4,400 hours

Revised standard hours = 4,400 × (1 – 12.5%) = 3,850 hours

Standard rate = $15 per hour

Planning variance = (4,400 – 3,850) × $15 = $8,250 F

Operational efficiency variance

Revised standard hours = 4,400 × (1 – 12.5%) = 3,850 hours

Actual hours = 4,180 hours

Planning variance = (3,850 – 4,180) × $15 = $4,950 A

Illustrations and further practice

Now try examples 2 and 3 from Chapter 10.

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