A company manufactures and assembles storage units. The standard output of its employees is 16 units per person in an eight hour day. There are two production lines, A and B, each of which has 10 employees. Workers on production line A are paid £7 per hour,

Question

A company manufactures and assembles storage units. The standard output of its
employees is 16 units per person in an eight hour day. There are two production
lines, A and B, each of which has 10 employees. Workers on production line A are
paid £7 per hour, but the workers on production line B are paid according to how
many units are produced each day at the rate of £4 per completed unit and a standard
output of 20 units per person in an 8 hour day.
The company produces the following information relating to the two production
lines for one day:

Accepted Answer

(a)
Production line A
Overall direct labour variance = £50 (favourable)

Calculation:
Standard pay rate of standard hours ([220 × 0.5 hours] × £7 = £770) compared
with actual pay rate of actual hours (£720)
Direct labour pay rate variance = £34 (adverse)

Calculation:
Standard pay rate of actual hours (£7 × 98 = £686) compared with actual pay rate
of actual hours (£720)
Direct labour efficiency variance = £84 (favourable)

Calculation:
Standard pay rate of actual hours (£7 × 98 = £686) compared with standard pay
rate of standard hours ([220 × 0.5 hours] × £7 = £770)

Production line B
Overall direct labour variance = £310 (adverse)

Calculation:
Standard pay rate of standard hours (80 hours/10 employees = 8 standard days ×
20 units per day = 160 units @ £4 per unit = £640) compared with actual pay rate
of actual hours (£950)

Direct labour pay rate variance = £10 (favourable)
Calculation:
Standard pay rate of actual hours (£4 × 240 = £960) compared with actual pay rate
of actual hours (£950)
Direct labour efficiency variance = £320 (adverse)

(b) The cost per unit of production line A is £3.27 (wage costs of £720 divided by output
of 220 units), compared to a cost per unit for production line B of £3.96 per unit
(wage costs of £950 divided by output of 240 units). On this basis, production line
A is clearly more cost efficient. Investigation of the variances show that whilst there
was a small adverse pay variance for production line A there were efficiency savings
of £84, giving an overall direct labour variance of £50 favourable. In contrast,
although there was an insignificant favourable pay rate variance (£10) there was
a large adverse efficiency variance (£320). Management would have to investigate
this further, as it might have been caused by specific factors e.g. machine breakdowns,
which were out of the control of the workforce. If that was not the case then
it would appear that the standard output of 20 units per day is not achievable. Either
this has to be reconsidered and a new standard set, or else production line B’s workforce
should be remunerated on the same basis as production line A.

Question 11.st.5: A company manufactures and assembles storage units. The stan...

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Related Answered Questions

	Production line A	Production line B
Output (units)	220	240
Employee hours worked	98	80
Wage costs (£)	720	950