43 12105 b Revised labour rate 1143 1040410200 1166 c The labour rate can be

# 43 12105 b revised labour rate 1143 1040410200 1166 c

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The original labour rate before allowing for the 5% increase was £11.43 (£12/1.05) (b) Revised labour rate = £11.43 × (104.04/102.00) = £11.66 (c) The labour rate can be analysed as follows: Planning variance due to error in estimating wage rates: (Original standard rate – Revised standard rate ) × Actual hours (£12 – £11.66) × 11 440 hours £3 890F Operational wage rate variance (Revised standard rate – Actual rate) × Actual hours = (Revised standard rate × Actual hours) × Actual wages cost (£11.66 × 11 440 hours = £133 390 – £136 708 ––––– Original wage rate variance 572F ––––– Solution IM 17.5 170 STANDARD COSTING AND VARIANCE ANALYSIS 1 12 480A 663 000 12 480A 718 108 3 318A
(d) The initial analysis suggests a favourable variance but the revised analysis indicates that this was due to an incorrect estimate of the wage rate. After allowing for an ex-post adjustment of the standard an adverse variance of £1144 is reported. This provides a different message from the initial analysis and the reasons for the adverse variance should be investigated. The revised analysis provides useful feedback information that will help management to improve the future estimates of wage rates. (e) The index may not be valid because of the following reasons: (i) The rate is an average and may incorporate many different skill levels. The average may not be applicable to Eastern Division. (ii) The index applies to the whole country but regional variations may apply. (iii) The company may have a policy of offering higher wage rates to attract high calibre personnel. Alternatively, there may be a shortage of labour in the area resulting in the need to offer higher wage rates to attract the requisite amount of labour. (f) See relevant variances within Chapter 17 for the answer to this question. (a) (i) Sales margin (profit) volume variance: (Actual volume – Budgeted volume) × Standard margin (£3) = £5250 Adverse (Actual volume × Standard margin) – (Budgeted volume × Standard margin) = £5250A (Actual volume × Standard margin) – £30 000 = –£5250 (Actual volume × Standard margin) = £24 750 Actual volume = £24 750/£3 = 8250 units (ii) Labour efficiency variance: (Standard hours – Actual hours) × Standard rate = £12000 Adverse (Standard hours × Standard rate) – (Actual hours × Standard rate) = –£12000 (8250 units × 4 hours =33 000 × £12) – (Actual hours × £12) = –12 000 £396 000 – (Actual hours × £12) = –12 000 Actual hours × £4 = £408 000 Actual hours = £408 000/£12 = 34 000 hours (iii) Material usage variance: (Standard quantity – Actual quantity) × Standard rate = £400F (Standard quantity × Standard rate) – (Actual quantity × Standard rate) = £400 (8250 × 5 litres = 41 250 litres × £0.20) – (Actual quantity × £0.20) = £400 £8250 – (Actual quantity × £0.20) = £400 Actual quantity × £0.20 = £7850 Actual quantity used = 39 250 litres Actual quantity purchased = 39 250 – stock decrease (800) = 38 450 litres (iv) Total variable overhead variance: Standard variable overhead cost – Actual cost = £500 Adverse (8250 × £6 = £49 500) – Actual cost = £500 Actual cost = £50 000 (v) Fixed overhead expenditure variance: Budgeted cost – Actual cost = £500 Favourable 10 000 units × £14 = £140 000 – Actual cost = £500 Actual cost = £139 500 Note that budgeted output = Budgeted profit (£30 000) Standard profit margin (£3) Solution IM 17.6 STANDARD COSTING AND VARIANCE ANALYSIS 1 171
(b) The answer should draw attention to the fact that standard costing is most suited to an organization whose activities consist of a series of common or repetitive operations. Standard costing procedures cannot easily be applied to non-manufacturing activities where the operations are of a non-repetitive nature,

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