Intermediate: Labour and overhead variances and export wage rate analysis Data The Eastern Division of Countryside Communica¬ tions pic 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:

Task 1

(a) Calculate the following variances:
(i) the labour rate variance;
(ii) the labour efficiency variance (some¬ times called the utilisation 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% 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 under¬ standing 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 allow¬ ing for the 5% 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;
(I) briefly explain the meaning of the following variances calculated in task 1 and for each variance suggest one reason why it may have occurred;
(i) the fixed overhead expenditure (or price) variance;
(ii) the fixed overhead capacity variance;
(iii) the fixed overhead efficiency (or usage) variance.
AAT Technicians Stage

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Standard costs and budgeted production-four weeks ended 27 November Standard Unit cost per Quantity price Beta Material 30 metres 12.00 360.00 Labour 10 hours 5.25 52.50 Fixed overhead 10 hours 15.75 157.50 Standard cost per Beta 570.00 Budgeted 1200 Betas 570.00 684 000 production