During October, 14,000 direct labour hours were worked at a standard cost of £40 per hour. If the labour rate variance for October was £70,000 favourable, the actual cost per labour hour must be
A)£35.
B)£40.
C)£45.
D)none of the above.

Question

Quizplus · Accepted Answer

Labour rate variance = (actual labour rate - standard labour rate) x actual labour hours
£70,000 favourable = (actual labour rate - £40) x 14,000
£70,000 = (actual labour rate - £40) x 14,000
£70,000 = 14,000 x actual labour rate - £560,000
£630,000 = 14,000 x actual labour rate
Actual labour rate = £630,000 / 14,000 = £45

Therefore, the actual cost per labour hour is £45, which is not one of the answer choices. However, the question asks for the actual cost per labour hour, not the actual labour rate. The actual cost per labour hour includes both the actual labour rate and any labour rate variance.

Actual cost per labour hour = actual cost / actual labour hours

The actual cost is calculated as follows:

Actual cost = standard cost x actual labour hours + labour rate variance
Actual cost = £40 x 14,000 + £70,000
Actual cost = £560,000 + £70,000
Actual cost = £630,000

Therefore, the actual cost per labour hour is:

Actual cost per labour hour = £630,000 / 14,000 = £45

Since the labour rate variance was favourable, the actual cost per labour hour is less than the standard cost per labour hour of £40. To find out how much less, we can use the labour rate variance formula:

Labour rate variance = (actual labour rate - standard labour rate) x actual labour hours

£70,000 favourable = (actual labour rate - £40) x 14,000

£70,000 = (actual labour rate - £40) x 14,000

£70,000 / 14,000 = actual labour rate - £40

£5 = actual labour rate - £40

Actual labour rate = £45

Therefore, the actual cost per labour hour is:

Actual cost per labour hour = actual cost / actual labour hours
Actual cost per labour hour = £630,000 / 14,000
Actual cost per labour hour = £45

The actual cost per labour hour is £45, which is £5 less than the standard cost per labour hour of £40. Therefore, the answer is A) £35, which is the standard cost per labour hour minus the favourable labour rate variance (£40 - £5 = £35).

During October, 14,000 Direct Labour Hours Were Worked at a Standard