ACCA Applied Knowledge · Management Accounting · Reconciliation of budgeted and actual profit
Karan Ltd's standard labour rate is $8 per hour. In a period, 5,000 hours were paid, but 4,600 hours were actually worked because of a machine breakdown. Wages paid were $42,500. What are the labour rate variance and idle time variance?
The rate variance is $2,500 adverse and idle time is $3,200 adverse. Hours paid of 5,000 at $8 cost $40,000 against $42,500 paid, and the 400 idle hours at the standard $8 rate are a separate adverse variance.
- ARate $2,500 adverse; idle time $3,200 adverseCorrect
- BRate $2,500 adverse; idle time $3,200 favourable
- CRate $1,700 adverse; idle time $3,200 adverse
- DRate $2,500 adverse; idle time $3,400 adverse
Explanation
Rate variance uses hours paid: 5,000 x $8 = $40,000 against $42,500 paid, giving $2,500 adverse. Idle time = 400 hours x $8 = $3,200 adverse. Using hours worked for the rate variance gives the wrong $1,700 figure.
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