Chapter 10, Problem 41P

The director of cost management for Portland Instrument Corporation compares each month’s actual results with a monthly plan. The standard direct-labor rates for the year just ended and the standard hours allowed, given the actual output in April, are shown in the following schedule.

A new union contract negotiated in March resulted in actual wage rates that differed from the standard rates. The actual direct-labor hours worked and the actual direct-labor rates per hour experienced for the month of April were as follows:

Required:

1. 1. Compute the following variances for April. Indicate whether each is favorable or unfavorable.
   1. a.      Direct-labor rate variance for each labor class.
   2. b.      Direct-labor efficiency variance for each labor class.
2. 2. Discuss the advantages and disadvantages of a standard-costing system in which the standard direct-labor rates are not changed during the year to reflect such events as a new labor contract.
3. 3. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) above. Show how the solution will change if the following information changes: the actual labor rates were $16.95, $15.10, and $10.60 for labor classes III, II, and I, respectively.