Budgeting - Variance Analysis

cazalino

Hi I have my exam on Thursday and am stuck on the attached question. Can anybody tell me how i calc the answers please - thank you guys

CeeJaySix

Get used to these, there's a lot more of them in Financial Performance!

The standard direct labour cost of production is simply flexing the budget to get the budgeted cost of labour for actual output, so:
1,728,000 / 18,000 x 17,000 = 1,632,000. It's worth calculating that the budgeted hourly rate is 1,728,000 / 18,000 = 6.

Rate variance is the same as price variance when thinking about materials. Using PAUS, price variance uses actual quantities. We're isolating the difference made by the price only. So:
Standard price of actual quantity used LESS actual price of actual quantity used. We know standard rate is 6/hr (above), we've actually used 280,500 hours (from the question) and it actually cost 1,626,900 (again from the question), so:
280,500 x 6 - 1,626,900 = 56,100 F

Efficiency variance is the same as usage variance, and PAUS says usage variance uses standard pricing. So:
Standard price of standard hours for level of production LESS standard price of the actual hours for the level of production. We're separating the difference made by the number of hours worked only. So:
1,632,000 (you already worked out the standard cost of the level of production at the start) - 280,500 x 6 = 51,000A.

The labour cost variance is the total of the two, so 56,100F less 51,000A = 5,100F. Personally I like to work this out first to use as a check against the other two - the formula is the standard cost of actual production less the actual cost of actual production. It's worth trying to figure out for yourself why each of these formulae work, as when you've got twenty-odd different ones floating around in FNPF, it's a lot easier if you can see from the question the formula needed, rather than trying to remember which one off your memorised list is relevant!

cazalino

Thank you, I don't like these lol! But thankfully it never came up in the exam!

tanna44

The budgeting hourly rate works out as 96? (1,728,000/18,000). Where has the 6 come from?

CeeJaySix

Sorry, typo in my answer. If you look at the question, it's £1,728k for 288k hours. I've included the wrong figure of 18k which is units produced. 1,728/288 = 6.