Exercise 11-4 Direct Labor and Variable Manufacturing Overhead Variances [LO11-2, LO11-3] Erie Company manufactures a small mp3 player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate mp3 player are as follows: Standard Hours Standard Rate per Hour Standard Cost 27 minutes $5.40 $2.43 During August, 9,410 hours of direct labor time were needed to make 19,400 units of the Jogging Mate. The direct labor cost totaled $49,873 for the month.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Exercise 11-4 Direct Labor and Variable Manufacturing
Erie Company manufactures a small mp3 player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate mp3 player are as follows:
| Standard Hours |
Standard Rate per Hour |
Standard Cost |
| 27 minutes | $5.40 | $2.43 |
|
|
During August, 9,410 hours of direct labor time were needed to make 19,400 units of the Jogging Mate. The direct labor cost totaled $49,873 for the month.
Required:
1. According to the standards, what direct labor cost should have been incurred to make 19,400 units of the Jogging Mate? By how much does this differ from the cost that was incurred? (Round Standard labor time per unit and Standard direct labor rate to 2 decimal places.)
2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculations.)
3. The budgeted variable manufacturing overhead rate is $4.5 per direct labor-hour. During August, the company incurred $47,050 in variable
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