Data:
The Eastern Division of Countryside Communications plc assembles a single product, the Beta. The Eastern Division has a fixed price contract with the supplier of the materials used in the Beta. The contract also specifies that the materials should be free of any faults. Because of these clauses in the contract, the Eastern Division has no material variances when reporting any differences between standard and actual production.
You have recently accepted the position of assistant management accountant in the Eastern Division. One of your tasks is to report variances in production costs on a four-weekly basis. Fixed overheads are absorbed on the basis of standard labour hours. A colleague provides you with the following data:

Actual production 1040 Betas
Task 1
(a) Calculate the following variances:
(i) The labour rate variance;
(ii) The labour efficiency variance (sometimes called the utilization variance);
(iii) The fixed overhead expenditure variance (sometimes known as the price variance);
(iv) The fixed overhead volume variance;
(v) The fixed overhead capacity variance;
(vi) The fixed overhead efficiency variance (sometimes known as the usage variance).
(b) Prepare a statement reconciling the standard cost of actual production with the actual cost of actual production.
Data
When the Eastern Division's budget for the four weeks ended 27 November was originally prepared, a national index of labour rates stood at 102.00. In preparing the budget, Eastern Division had allowed for a 5 per cent increase in labour rates. For the actual four weeks ended 27 November, the index stood at 104.04. Because of this, Ann Green, Eastern Division's production director, is having difficulty understanding the meaning of the labour rate variance calculated in task 1.
Task 2
Write a memo to Ann Green. Your memo should:
(a) Identify the original labour rate before allowing for the 5 per cent increase;
(b) Calculate the revised standard hourly rate using the index of 104.04;
(c) Subdivide the labour rate variance calculated in task 1(a) into that part due to the change in the index and that part arising for other reasons;
(d) Briefly interpret the possible meaning of these two subdivisions of the labour rate variance;
(e) Give two reasons why the index of labour rates might not be valid in explaining part of the labour rate variance.

Transcribed Image Text:

Standard costs and budgeted production four weeks ended 27 November Standard cost Quantity Unit price per Beta Material Labour Fixed overhead Standard cost per Beta 30 metres 12.00 10 hours £12.00 10 hours £15.25 5360.00 £120.00 £157.50 £637.50 Budgeted production 1200 Betas £637.50 765000 Actual production four weeks ended 27 November Quantity Total cost Actual cost of material Actual cost of labour Actual fixed cost overheads Actual cost of actual production 31200 metres 11440 hours £374 400 £136 708 £207 000 £718 108