Hello Anupama,
I will try to explain. Please keep these points in mind as a base -
Rate Variance - if the actual Cost incurred (actual rate x actual quantity) is lesser than (actual quantity x standard rate) Standard cost then, it is favorable meaning you paid less for the standard quantity and unfavorable if vice versa, meaning you paid more
Efficiency variance - if the actual hours consumed (actual quantity x standard rate) is less than (standard quantity x standard rate) standard hours estimated, then it is favorable meaning the hours required to produce standard quantity was less compared to Standard and unfavorable if vice versa, meaning you needed more hours than standard to complete the standard quantity
Now with this in mind, Let us compare these in a straight line. Remember a point when you compare - AQ x SR is a common center point from where you will compare rate variance on left and efficiency variance on right.
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AQ x AR |
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AQ x SR (Point of comparison - Towards right for efficiency and left will be rate variances) |
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SQ x SR |
Explanation |
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Step 1 - Fill what you are already given |
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280 |
160 cars x .25 hrs x 7 |
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Step 2 - take clue from question |
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266 |
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Question says, the efficiency variance is favorable by $ 14 (means, we consumed less hours compared to standard hours).
So, 280 - 14 = 266 |
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14 |
Taken from question as a Favorable variance |
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Step 3 to arrive at actual hours |
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38 |
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here you will divide 266 by the standard rate of 7 which is 38 hours |
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Step 4 - Compare dervied value and fill the left formula using inputs from question |
285 |
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Question gives you the data that the rates were unfavorable (means we paid more labor rate)
compared to standard for the number of cars serviced
So, in numbers from the formula value in center 266 + 19 = 285 |
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19 |
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Taken from question as a Unfavorable variance |
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7.5 |
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here you will divide actual hourly rate paid in total 285 by actual hours calculated (derived) above which is 38. So 285/38 = 7.5/ hour |
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My explanation might be overwhelming with so much written above. But, if you take some time and go through these steps I hope it may help.
Padmesh T
Cherpulassery, Palakkad
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Padmesh Thevar
Controller
Hebbal Bangalore
India
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Original Message:
Sent: 08-03-2022 11:31 AM
From: Anupama D
Subject: Solution needed
Hi,
Help me understand this.
MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure checks) for cars. The company advertises that all services are completed within 15 minutes for each service. On a recent Saturday, 160 cars were serviced resulting in the following labor variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil's standard labor rate is $7 per hour, determine the actual wage rate per hour and the actual hours worked.
A. Wage Rate $6.67/hour, Hours Worked 42.71.
B. Wage Rate $6.55/hour; Hours Worked 42.00.
C. Wage Rate $7.50/hour; Hours Worked 38.00.
D. Wage Rate $7.45/hour, Hours Worked 42.00. |
The answer is C.
Fovarable is taken as negative and unfavorable is taken as positive. Why?
If not the answer would be D.
Thanks in advance.
Anupama