Calculation and explanation of labour and overhead variances A company had a budget of 200 000 direct labour hours for a period. This was used as the basis for establishing standard factory overhead absorption rates. Fixed factory overhead was budgeted to be £400000, and variable factory overhead £200000. Output was budgeted at 400 000 units. In the period 420 000 units were completed in 202000 direct labour hours, at a labour cost of

£787 800. No labour rate variance occurred. The factory overhead incurred during the period was £620 000.

Required:

(a) Calculate the following variances:

(i) labour efficiency;

(ii) overhead expenditure;

(iii) fixed overhead volume;

(iv) variable overhead efficiency. (12 marks)

(b) Explain the meaning and significance of the fixed overhead volume variance. How may the fixed overhead volume variance be further analysed? (6 marks)

(c) (i) Calculate the efficiency ratio in the situation outline above.

(ii) What are the implications for both unit costs and profit of such efficiency?

To answer part

(c) (ii) you must assume, also, that a bonus scheme is in operation, and that this is related to the level of efficiency.