Chapter 7, Problem 7.46P

Variances in the service sector. Derek Wilson operates Clean Ride Enterprises, an auto detailing company with 20 employees. Jamal Jackson has recently been hired by Wilson as a controller. Clean Ride’s previous accountant had done very little in the area of variance analysis, but Jackson believes that the company could benefit from a greater understanding of his business processes. Because of the labor-intensive nature of the business, he decides to focus on calculating labor variances.

Jackson examines past accounting records, and establishes some standards for the price and quantity of labor. While Clean Ride’s employees earn a range of hourly wages, they fall into two general categories: skilled labor, with an average wage of $20 per hour, and unskilled labor, with an average wage of $10 per hour. One standard 5-hour detailing job typically requires a combination of 3 skilled hours and 2 unskilled hours.

Actual data from last month, when 600 detailing jobs were completed, are as follows:

Skilled (2,006 hours)	$39,117
Unskilled (944 hours)	9,292
Total actual direct labor cost	$ 48,409

Looking over last month’s data. Jackson determines that Clean Ride’s labor price variance was $1,151 favorable, but the labor efficiency variance was $1,560 unfavorable. When Jackson presents his findings to Wilson, the latter is furious. “Do you mean to tell me that my employees wasted $1,560 worth of time last month? I’ve had enough. They had better shape up, or else!” Jackson tries to calm him down, saying that in this case the efficiency variance doesn’t necessarily mean that employees were wasting time. Jackson tells him that he is going to perform a more detailed analysis, and will get back to him with more information soon.

1. 1. What is the budgeted cost of direct labor for 600 detailing jobs?
2. 2. How were the $1,151 favorable price variance and the $1,560 unfavorable labor efficiency variance calculated? What was the company’s flexible-budget variance?
3. 3. What do you think Jackson meant when said that “in this case the efficiency variance doesn’t necessarily mean that employees were wasting time”?
4. 4. For the 600 detailing jobs performed last month, what is the actual direct labor input mix percentage? What was the standard mix for labor?
5. 5. Calculate the total direct labor mix and yield variances.
6. 6. How could these variances be interpreted? Did the employees waste time? Upon further investigation, you discover that there were some unfilled vacancies last month in the unskilled labor positions that have recently been filled. How will this new information likely impact the variances going forward?