Question Three

A company had a budget of $200000$ 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 $400000$ units.

In the period $420000$ units were completed in $202000$ direct labour hours, at a labour cost of $787800.$

No labour rate variance occurred. The factory overhead incurred during the period was $620000.$

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 analyzed?

$(6$ marks$)$

$($c$)($i$)$ Calculate the efficiency ratio in the situation outlined 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.