Question

Aman is worried about her labour costs. She budgeted that each of her products would take 1.33 hours to complete at a rate of $26 per direct labour hour. This month, Aman’s business has produced 1,850 products. She has paid her workers a total of $55,500 in wages. Additionally, there is a 5% CPP expense which must also be paid (Aman includes this in her budgeting). Aman also gave a $500 bonus to all fourteen of her workers, since they have been working hard through long hours. Prepare a variance analysis model and give her some advice on if she is doing well and, if not, how things can be improved. Discuss all relevant factors, including more information that you may request from Aman and further analysis you would like to do.

Answer 1

Solution: Variances analysis method: It is an quantitative investigation that is the difference between the actual and the expected behaviour or in the other way it can also be defined as the deviation between the actual and standard cost. Its main or primary objective is to control cost and cost reduction. Budgeted Time for 1 product = 1.33 hours Labour cost per hour = $26 Actual Production = 1850 products Labour wage paid = $55500 From labour wage we can calculate no. Of hours taken: = 55500 = 2134.6 hours 26 Budgeted hours: = 1850x1.33 = 2460.5 So we can see there is a favourable variance here of 325.4 hours. It was budgeted to take 2460.5 hours but took only 2134.6 hours.

In terms of labour wage paid According to budget: = 2460.5 $26 = $62500 She also paid a bonus to all 14 employees of 500 each. Total = $55500 + $7000 = $62500 This is still lower than the budgeted cost which would have been $ 63973 so again it is favourable for Aman. Since the 5% CPP is already included in budgeted we don't need to worry about it. From the above we can say that Aman is doing fairly well and can continue in the same way. That is in regards to the information that we have in hand right now! Things could be different if more information is obtained. But at present things look good.

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