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94. What is the labour efficiency variance?
Kruger Corporation has recently implemented a standard cost system. The management has obtained the following information for variance analysis:
(a) Standard cost information:
Direct materials = Rs.5 per kg.
Quantity allowed per unit = 100 kg per unit
Direct labour rate = Rs.20 per hour
Hours allowed per unit = 2 hours per unit
Fixed overhead budget = Rs.12,000 per month
Normal level of production = 1,200 units
Fixed overhead application rate = Rs.10 per unit
Variable overhead applicable rate = Rs.2 per unit
Total overhead applicable rate = Rs.12 per unit
(b) Actual cost information:
Cost of material purchased and consumed = Rs.4,68,000
Quantity of material purchased and consumed = Rs.1,04,000 kg
Cost of direct labour = Rs.46,480
Hours of direct labour = 2240 hrs.
Cost of variable overhead = Rs.2,352
Cost of fixed overhead = Rs.12,850
Volume of production = 1000 units

  • Option : A
  • Explanation : We multiply the excess direct labour hours by the standard wage rate to calculate the variance. This gives an adverse variance of £13,500. The formula for calculating the labour efficiency variance is:
    the labour efficiency variance is equal to the difference between the standard labour hours for actual production (SH) and the actual labour hours worked (AH) during the period multiplied by the standard wage rate per hour (SR):
    (SH – AH) × SR.
    Labour Efficiency Variance
    = SR (SH – AH)
    Where SR = Standard wage rate per hours
    SH = Standard Labour hours for actual production
    AH = Actual hours worked
    = 20(2000 – 2240)
    = 20 (–240) = 4800 (UF).
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