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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

Budgeted output was 10,000 units with a standard labour cost of $12 per unit. Actual output was 11,000 units and actual labour cost was $135,000. A cost reduction programme during the year permanently lowered the standard labour cost to $11 per unit, but reports still used the original standard. What is the labour cost variance based on the ORIGINAL standard, and what would it be against the revised standard?

Against the original standard the variance is $3,000 adverse, since flexed standard cost is $132,000 against actual of $135,000. Against the revised standard of $11 per unit, flexed cost is $121,000, so the variance is $14,000 adverse.

  1. A$3,000 adverse against the original; $14,000 adverse against the revisedCorrect
  2. B$3,000 adverse against the original; $16,000 adverse against the revised
  3. C$15,000 adverse against the original; $14,000 adverse against the revised
  4. D$3,000 adverse against the original; $14,000 favourable against the revised

Explanation

Original flexed standard cost = 11,000 × $12 = $132,000. Actual $135,000 gives $3,000 adverse. Revised standard = 11,000 × $11 = $121,000. Actual $135,000 gives $14,000 adverse. The second option wrongly computes the revised standard cost as $119,000, and the others misuse the base or sign.

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