Chapter 16, Problem 46P

1.

To determine

Calculate the direct labor rate for both departments i.e., assembly and testing and the efficiency variances for both years.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

A standard cost system is one in which the formal accounting records flow through standard, not actual, cost.

The variance in Labor Efficiency (VE) Is the difference between the actual hours worked and the allowable standard hours units produced, multiplied by the standard salary rate.

The direct labor rate variance (RV) is the difference between the actual rate of pay and the standard rate of pay multiplied by the actual direct labor hours worked during the period.

For assembly department:

Prior year:

Total actual direct labor hours: 25 × 20,000 = 500,000

Total standard direct labor hours: 24 × 20,000 = 480,000

The formula to calculate the direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labor rate variance}=\text{Actual hours worked }\times (\text{Actual}-\text{Standard})\text{wage rate/hr}\\ =500,000\text{ hours }\times (\$30\text{/hr}-\$28\text{/hr})\\ =\$\text{1,000,000 U}\end{array}$

The formula to calculate the direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labor efficiency variance}=\text{Standard wage rate/hr }\times (\text{Actual}-\text{Standard})\text{direct labor hours}\\ =\$28\text{/hr}\times (500,000-480,000)\\ =\text{\$560,000 U}\end{array}$

Current year:

Total actual direct labor hours: 20 × 20,000 = 400,000

Total standard direct labor hours:     21 × 20,000 = 420,000

The formula to calculate the direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labor rate variance}=\text{Actual hours worked }\times (\text{Actual}-\text{Standard})\text{wage rate/hr}\\ =400,000\text{ hours }\times (\$36\text{/hr}-\$35\text{/hr})\\ =\$\text{400,000 U}\end{array}$

The formula to calculate the direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labor efficiency variance}=\text{Standard wage rate/hr }\times (\text{Actual}-\text{Standard})\text{direct labor hours}\\ =\$35\text{/hr}\times (400,000-420,000)\\ =\text{\$700,000 F}\end{array}$

For testing department:

Prior year:

Total actual direct labor hours: 12 × 20,000 = 240,000

Total standard direct labor hours:     14 × 20,000 = 280,000

The formula to calculate the direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labor rate variance}=\text{Actual hours worked }\times (\text{Actual}-\text{Standard})\text{wage rate/hr}\\ =240,000\text{ hours }\times (\$20\text{/hr}-\$21\text{/hr})\\ =\$\text{240,000 F}\end{array}$

The formula to calculate the direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labor efficiency variance}=\text{Standard wage rate/hr }\times (\text{Actual}-\text{Standard})\text{direct labor hours}\\ =\$21\text{/hr}\times (240,000-280,000)\\ =\text{\$840,000 F}\end{array}$

Current year:

Total actual direct labor hours: 10 × 20,000 = 200,000

Total standard direct labor hours: 11 × 20,000 = 220,000

The formula to calculate the direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labor rate variance}=\text{Actual hours worked }\times (\text{Actual}-\text{Standard})\text{wage rate/hr}\\ =200,000\text{ hours }\times (\$24\text{/hr}-\$25\text{/hr})\\ =\$\text{200,000 F}\end{array}$

The formula to calculate the direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labor efficiency variance}=\text{Standard wage rate/hr }\times (\text{Actual}-\text{Standard})\text{direct labor hours}\\ =\$25\text{/hr}\times (2400,000-220,000)\\ =\text{\$500,000 F}\end{array}$

2.

To determine

Calculate the direct labor partial productivity ratio for both departments during the two years.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

A standard cost system is one in which the formal accounting records flow through standard, not actual, cost.

The variance in Labor Efficiency (VE) Is the difference between the actual hours worked and the allowable standard hours units produced, multiplied by the standard salary rate.

The direct labor rate variance (RV) is the difference between the actual rate of pay and the standard rate of pay multiplied by the actual direct labor hours worked during the period.

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved.

Calculate the Operational Partial Productivity for the assembly department:

Prior year:

$\begin{array}{c}\text{Operational partial productivity ratio}=20,000÷500,000\\ =0.04\end{array}$

Current year:

$\begin{array}{c}\text{Operational partial productivity ratio}=20,000÷400,000\\ =0.05\end{array}$

Calculate the Operational Partial Productivity for the testing department:

Prior year:

$\begin{array}{c}\text{Operational partial productivity ratio}=20,000÷240,000\\ =0.083333\end{array}$

Current year:

$\begin{array}{c}\text{Operational partial productivity ratio}=20,000÷14,400,000\\ =0.001389\end{array}$

3.

To determine

Calculate the partial ratio of financial productivity for both departments for the two years.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

Calculate the Financial Partial Productivity for the assembly department:

Prior year:

$\begin{array}{c}\text{Financial partial productivity ratio}=20,000÷15,000,000\\ =0.001333\end{array}$

Current year:

$\begin{array}{c}\text{Financial partial productivity ratio}=20,000÷14,400,000\\ =0.001389\end{array}$

Calculate the financial Partial Productivity for the testing department:

Prior year:

$\begin{array}{c}\text{Financial partial productivity ratio}=20,000÷4,800,000\\ =0.004167\end{array}$

Current year:

$\begin{array}{c}\text{Financial partial productivity ratio}=20,000÷4,800,000\\ =0.004167\end{array}$

4.

To determine

Compare the direct labor partial operational productivity ratio and the partial financial productivity ratio for both departments in both years.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

Operational partial productivity	Prior year	Current year	Change
Assembly	0.04	0.05	0.01 F
Testing	0.083333	0.1	0.016667 F

Financial partial productivity	Prior year	Current year	Change
Assembly	0.001333	0.001389	0.000056 F
Testing	0.004167	0.004167	0

In both departments, operational partial efficiency increased from the preceding to the current year. The Assembly also increased in financial partial efficiency although the testing remains constant.

5.

To determine

Mention how the metrics of productivity vary from the study of variation in terms of the types of perspectives which will be provided for the strategic decision making of the company.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

A standard cost system is one in which the formal accounting records flow through standard, not actual, cost.

The criteria are also calculated separately within a standard costing framework and integrate improvements in operational variables. The norm for a year's operation will change due, for example, to changes in technology, material quality, manufacturing experience, designs or processes. Productivity measures use a prior year's productivity without adjustment for adjustments occurring or the anticipated changes in the current year as the metric. As a result, efficiency evaluations in a standard costing framework that depict a completely different image from that of variance analysis.