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ACCA Applied Knowledge · Management Accounting · Standard costing system

A company sets its standard labour rate using a standard that assumes all staff are paid at grade B, $12 per hour. Production in the period required 1,000 standard hours and the actual 1,000 hours worked were paid at an average $13 per hour because grade A staff at $15 were used. Which statement about the standard cost card is correct?

The labour rate variance is $1,000 adverse, being 1,000 hours times the $1 excess over the $12 standard rate. It arises because a costlier grade mix was used than the standard assumed, so it is potentially controllable and should be investigated rather than simply absorbed into a new standard.

  1. AThe standard should be revised immediately to $13 per hour with no further analysis
  2. BThe $1,000 adverse rate variance arises because the standard assumed a different grade mix and is potentially controllableCorrect
  3. CThe $1,000 favourable rate variance arises because more skilled staff were used
  4. DThe variance is a usage variance because the hours worked equal the standard hours

Explanation

Rate variance = (12 - 13) x 1,000 = $1,000 adverse. It results from using a more expensive grade than the standard assumed, so management can investigate whether it was controllable. It is a rate, not efficiency, variance since hours equal standard. Changing the standard automatically would hide the cause.

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