Chapter 9, Problem 10E

Direct Labor and Variable Manufacturing Overhead Variances
Eric Company manufactures a mobile fitness device called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate are as follows:

During August, 5,750 hours of direct labor time were needed to make 20.000 units of the Jogging Mate. The direct labor cost totaled $ 102.350 for the month.
Required:

1. What is the standard labor-hours allowed (SH) to makes 20.000 Jogging Mates?

What is the standard labor cost allowed (SH * SR) to make 20.000 Jogging Mates?

What is the labor spending variance?

What is the labor rate variance and the labor efficiency variance?

The budgeted variable manufacturing overhead rate is $4 per direct labor-hour. During August. The company incurred S2 1,850 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.

To determine

Standard labor hours

Standard hours represent the number of hours that should have been used by the labors during production in a particular accounting period.

To calculate:Standard labor hours that can be used to produce 20,000 units.

Answer to Problem 10E

Standard labor hours allowed to use for 20,000 units of given product are 6,000 hours.

Explanation of Solution

Standard hours allowed are determined by multiplying actual number of units that a company produce and standard hours available for each unit.

Here, number of units are given as 20,000 and standard time for one unit is 18 minutes. So thw standard hours allowed will be:

  $\begin{array}{l}\text{Standard hours allowed = number of units }\times \text{ standard time for one unit }\\ \text{ = 20,000 }\times \text{ 18 minutes }\\ \text{ = 360,000 minutes or 6,000 hours }\end{array}$

So, standard hours allowed are 6,000 hours.

To determine

Standard labor cost

Standard cost represents the amount of cost that should be incurred on labors during a period.

To calculate: Standard cost allowed for 20,000 units.

Answer to Problem 10E

Standard cost allowed for 20,000 units is $102,000.

Explanation of Solution

Allowed standard labor cost is calculated by the product of allowed standard labor hours and standard rate for one hour.

Here, allowed standard hours are 6,000 (calculated in sub part 1) and standard rate is $17 per hour. So, allowed standard labor cost will be:

  $\begin{array}{l}\text{Standard labor cost allowed = Standard hours allowed }\times \text{ Standard rate for one hour }\\ \text{ = 6,000 }\times \text{ \$17 }\\ \text{ = \$102,000}\end{array}$

Allowed standard labor cost is $102,000.

To determine

Spending variance

A spending variance represents the difference between actual amount of expense incurred and standard expense.

labor spending variance with the given figures.

Answer to Problem 10E

Labor spending variance is $350 unfavorable.

Explanation of Solution

Labor spending variance is determined by deducting actual labor cost from the standard labor cost.

Here, standard labor cost is $102,000 (calculated in sub part 2) and actual cost of labor is $102,350.

So, required variance will be:

  $\begin{array}{l}\text{Labor spending variance = Standard labor cost - Actual cost of labor }\\ \text{ = \$102,000 - \$102,350}\\ \text{ = \$350 unfavorable}\end{array}$

Labor spending variance is $350 unfavorable.

To determine

Labor rate variance

labor cost variance represents the difference between actual cost incurred on labor and expected cost.

Labor efficiency variance

Labor efficiency variance represents the difference between actual hours worked by labors and the expected hours.

Amount of labor rate and efficiency variances.

Answer to Problem 10E

Labor rate variance is $4,600 unfavorable and labor efficiency variance is $4,250 favorable.

Explanation of Solution

The formula to calculate labor rate variance is:

  $\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours worked}$

Here, standard rate is given as $17 per hour and actual labor hours are given as 5,750. Actual rate will be calculated as:

  $\begin{array}{l}\text{Actual rate = }\frac{\text{Direct labor cost}}{\text{Direct labor hours}}\\ \text{Actual rate = }\frac{\$102,350}{5,750}\\ \text{Actual rate = \$17}\text{.8 per hour }\end{array}$

So, actual rate is $17.8 for every hour. Now, variance will be calculated as:

  $\begin{array}{l}\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours worked }\\ \text{ = (\$17 - \$17}\text{.8)}\times 5,750\\ \text{ = \$4,600 unfavorable}\end{array}$

Formula to calculate labor efficiency variance is:

  $\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard}\text{rate}$

Here, actual hours are given as 5,750, standard hours are 6,000 (calculated in sub part 1) and standard rate is $17 per hour. So, variance will be calculated as:

  $\begin{array}{l}\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard}\text{rate }\\ \text{ = (6,000 - 5,750)}\times \$17\\ \text{ = \$4,250 favorable}\end{array}$

So, labor rate variance is calculated as $4,600 and labor efficiency variance is calculated as $4,250.

To determine

Variable overhead rate variance

This variance represents the difference between actual variable cost incurred and standard cost on variable overheads.

Variable overhead efficiency variance

This variance represents the difference between actual hours spent on variable production overhead and the budgeted hours.

Amount of variable overhead rate and efficiency variances.

Answer to Problem 10E

Variable overhead rate variance is $1,150 favorable and variable efficiency variance is 1,000 favorable.

Explanation of Solution

Formula to calculate variable overhead rate variance is:

  $\text{Variable overhead rate variance = Actual hours worked}\times \text{(Standard overhead rate - Actual overhead rate)}$

Here, actual hours worked are 5,750 and standard variable overhead rate is given as $4 per hour. Actual variable overhead rate will be calculated as:

  $\begin{array}{l}\text{Actual variable overhead rate = }\frac{\text{Variable manufacturing overhead cost}}{\text{Actual hours}}\\ \text{Actual variable overhead rate = }\frac{\$21,850}{5,750}\\ \text{Actual variable overhead rate = \$3}\text{.8 per hour }\end{array}$

So, actual variable overhead rate is $3.8 per hour. Now, variance will be calculated as:

  $\begin{array}{l}\text{Variable overhead rate variance = Actual hours worked}\times \text{(Standard overhead rate - Actual overhead rate) }\\ \text{ = 5,750}\times \text{(4 - 3}\text{.8)}\\ \text{ = \$1,150 favorable}\end{array}$

Formula to calculate variable overhead efficiency variance is:

  $\text{Variable overhead efficiency variance = Standard overhead rate}\times \text{(Standard hours - Actual hours)}$

Here, standard overhead efficiency variance is given as $4 per hour, actual hours are 5,750 and standard hours are 6,000 (calculated in sub part 1). So, the calculation of variance will be:

  $\begin{array}{l}\text{Variable overhead efficiency variance = Standard overhead rate}\times \text{(Standard hours - Actual hours) }\\ \text{ = 4}\times \text{(6,000 - 5,750)}\\ \text{ = \$1,000 favorable}\end{array}$

So, variable overhead rate variance is calculated as $1,150 favorable and variable overhead efficiency variance is calculated as $1,000 favorable.