Here is a summary and answer to the question based on the information provided: ### **Summary of the Scenario** - **Sam** wants to understand why labour costs are high. - **Nina** provides a variance analysis for direct labour costs. - **Budgeted labour rate:** £10 per hour - **Actual labour rate:** £10.50 per hour ### **Table 12.12 - Labour Variances** | | Tennis Racquets (12,000 units) | Badminton Racquets (5,000 units) | |-------------------------|-------------------------------|-----------------------------------| | Budget direct labour | £90,000 | £62,500 | | Actual direct labour | £88,200 | £78,750 | | Variance | £1,800 | (£16,250) | | Labour rate variance | (£4,200) | (£3,750) | | Labour usage variance | £6,000 | (£12,500) | ### **Analysis of Variances** #### **Labour Rate Variance** - **Formula:** (Actual Rate - Budgeted Rate) x Actual Hours Worked - **Reason for Adverse Variance:** - Actual rate (£10.50) is higher than budgeted (£10). - Possible reasons: - Wage increases or overtime premiums. - Hiring more skilled (and expensive) workers. - Inefficient wage negotiation or labor market shortages. #### **Labour Usage Variance** - **Formula:** (Actual Hours Worked - Budgeted Hours Allowed) x Budgeted Rate - **Reason for Variance:** - **Favorable for Tennis Racquets:** Used fewer hours than budgeted. - Possible reasons: Improved worker efficiency, better training, or use of technology. - **Adverse for Badminton Racquets:** Used more hours than budgeted. - Possible reasons: Lower worker productivity, machine breakdowns, or poor supervision. #### **Overall Variance** - **Tennis Racquets:** Favorable (£1,800) - Savings from using fewer hours outweighed the higher hourly rate. - **Badminton Racquets:** Adverse (£16,250) - Extra hours and higher wage rate led to significant overspending. ### **Conclusion:** The high labor costs are driven by: 1. **Higher wage rates** than budgeted. 2. **Inefficient usage of labor hours** (especially for badminton racquets). 3. **Unexpected operational issues** (e.g., overtime, low efficiency, machine downtime, inadequate training). **Recommendation:** Investigate the causes of higher wage rates, improve labor efficiency, and provide better training/supervision to control labor costs. If you need further calculation or breakdown, let me know!