Could somesome please help me? ACCA Planning & Operational Variances for Labour Cost

lukayl

I find the planning and operational variances very quicky. I just barely understand the material planning and operational variances after watching related Opentuition lectures. But when it comes to labour ones, I am lost again, only this time Opentuition doesn't cover it at all.

So here it comes the scenario(I will skip the material question and only focus on the labours):

Below is a standard cost card extract from POV Ltd:


For the period, due to the material's unavailable situation, the company found an alternative one. 2500 units were budgeted to be produced and sold but the actual production and sales were 2850 units.

Weather conditions unexpectedly improved for the period with the result that a 50 cent per hour bad weather bonus, which had been allowed for in the original standard, did not have to be paid. Because of the difficulties expected with the alternative material, management agreed to pay the workers $8 per hour for the period only. During the period 18800 hours were paid for.

Please calculate the planning and operational variances for labour cost.

Text solution:

Labour rate for planning variances


Labour rate for operational variances


I just don't understand the solution. The theory in the textbook is something like this:

And I just get frustrated. :mad:

I mean where do these Weather bonus and Alternative material difficulties come from? Shouldn't they rather be rate variance and efficiency variance?

Also why rate variance is zero in operational variance? Could someone please help me out?

Big thanks in advance!

keano2012

no idea! but think this is one for the argument as to whether or not you go to college to study ACCA!

SBWife

Original flexed budget use $7 per hour and actual units produced at the original budgeted hours per unit ( include the bad weather allowance)

Revised flexed same as above but with rate of €8

Actual rate of €8, actual units hours without bad weather allowance.

First will be a unfavourable variance - labour is costing more then originally expected.
Second will be favourable units take less time to produce because weather is better.

SBWife

The rate variance is zero in the operational variance because you included the revised rate in the revised budget. Both the budgeted and actual amount are €8.

Weather related bonus is considered separately, it comes down to the use of variances we want to separate out the results of decisions where management has played a role and where they have not.

lukayl

SBWife wrote: »

Original flexed budget use $7 per hour and actual units produced at the original budgeted hours per unit ( include the bad weather allowance)

Revised flexed same as above but with rate of €8

Actual rate of €8, actual units hours without bad weather allowance.

First will be a unfavourable variance - labour is costing more then originally expected.
Second will be favourable units take less time to produce because weather is better.

What do you mean? I am totally lost.

lukayl

SBWife wrote: »

The rate variance is zero in the operational variance because you included the revised rate in the revised budget. Both the budgeted and actual amount are €8.

Why the rate are the same? Why $8 in the first place?

SBWife

$8 is given in the question as the revised rate.

lukayl

SBWife wrote: »

$8 is given in the question as the revised rate.

Yes, that I understand. But I just don't understand why the rate variance is zero for operational variances.
Could you help me out to expand the solution in details like in some sort of equation why it is zero, please? Thanks!

SBWife

The revised budget rate is €8.
The actual rate is €8.
Therefore the rate variance is zero.

What don't you understand about that?

lukayl

SBWife wrote: »

The revised budget rate is €8.
The actual rate is €8.
Therefore the rate variance is zero.

What don't you understand about that?

I am lost? Shouldn't the $6.5 be the revised budgeted rate?

SBWife

lukayl wrote: »

I am lost? Shouldn't the $6.5 be the revised budgeted rate?

No, budget only includes the information known prior to the start of the period, initially rate was €7, then because of the alternative material the budget was revised, at that point the rate was €8, management didn't know that the weather bonus wouldn't have to be paid so couldn't use this information it in the budget.

lukayl

SBWife wrote: »

No, budget only includes the information known prior to the start of the period, initially rate was €7, then because of the alternative material the budget was revised, at that point the rate was €8, management didn't know that the weather bonus wouldn't have to be paid so couldn't use this information it in the budget.

Thanks! Is this constraint only applying to the operational variances? Since why planning variances can use the $6.5? Shouldn't it be excluded in the budget as well?

SBWife

Sit down and read the question carefully then maybe you'll understand it, I can't explain it to you again.

lukayl

SBWife wrote: »

Sit down and read the question carefully then maybe you'll understand it, I can't explain it to you again.

I am sorry, but after several days of working, I still couln't figure it out. I still don't understand why $6.5 should not be considered revised standard rate in operational variance while it is valid when it comes to calculate the planning variance? Could you help me to further explain this, please? Thanks!

lukayl

SBWife wrote: »

Sit down and read the question carefully then maybe you'll understand it, I can't explain it to you again.

Yeah? Well, you are not helping!