Chapter 9, Problem 5PA

CodeHead Software Inc. does software development. One important activity in software development is writing software code. The manager of the WordPro Development Team determined that the average software programmer could write 25 lines of code in an hour. The plan for the first week in May called for 4,650 lines of code to be written on the WordPro product. The WordPro Team has five programmers. Each programmer is hired from an employment firm that requires temporary employees to be hired for a minimum of a 40-hour week. Programmers are paid $32.00 per hour. The manager offered a bonus if the team could generate more lines for the week, without overtime. Due to a project emergency, the programmers wrote more code in the first week of May than planned. The actual amount of code written in the first week of May was 5,650 lines, without overtime. As a result, the bonus caused the average programmer’s hourly rate to increase to $40.00 per hour during the first week in May.

Instructions

1. 1. If the team generated 4,650 lines of code according to the original plan, what would have been the labor time variance?
2. 2. What was the actual labor time variance as a result of generating 5,650 lines of code?
3. 3. What was the labor rate variance as a result of the bonus?
4. 4. The manager is trying to determine if a better decision would have been to hire a temporary programmer to meet the higher programming demand in the first week of May, rather than paying out the bonus. If another employee was hired from the employment firm, what would have been the labor time variance in the first week?
5. 5. Which decision is better, paying the bonus or hiring another programmer?

To determine

Compute the direct labor time variance, if the team had generated 4,650 lines of code according to the original plan.

Explanation of Solution

Direct labor variances:

The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows:

• v Labor rate variance.
• v Labor time variance.

Determine the direct labor time variance.

$\begin{array}{c}\begin{array}{l}\text{Direct labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours (1)}-\\ \text{Standard direct labor hours (2)}\end{array}\right)\text{× Standard rate per hour}\right]\\ =\left[\left(200\text{hours}-186\text{ hours}\right)\text{× \$32 per hour}\right]\\ \text{=}\left[\text{14 hours× \$32}\text{per hour}\right]\\ \text{=\$448}\end{array}$

Working note (1):

Compute the actual labor hours:

$\begin{array}{c}\text{Actual labor hours=}\left(\begin{array}{l}\text{Number of employees}\times \text{Number}\\ \text{of labor hours per week}\end{array}\right)\\ =5\text{employees}\times 40\text{hours}\\ \text{=200}\text{hours}\end{array}$

Working note (2):

Compute the standard direct labor hours:

$\begin{array}{c}\left(\begin{array}{l}\text{Standard direct }\\ \text{labor hours}\end{array}\right)=\left(\frac{\text{Number of lines generated}}{\text{Standard labor time per hour}}\right)\\ =\frac{4,650\text{lines}}{25\text{lines per hour}}\\ =186\text{hours}\end{array}$

Conclusion

The direct labor time variance is $448 and it is an unfavorable variance, since the actual direct labor hour is more than the standard direct labor hour.

To determine

Compute the actual labor time variance, as a result of generating 5,650 lines of code.

Explanation of Solution

Determine the direct labor time variance.

$\begin{array}{c}\begin{array}{l}\text{Actual labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours}-\\ \text{Standard direct labor hours (3)}\end{array}\right)\times \text{Standard rate per hour}\right]\\ =\left[\left(200\text{hours}-226\text{ hours}\right)\times \text{\$32 per hour}\right]\\ =\left[\left(26\right)\text{hours}\times \text{\$32}\text{per hour}\right]\\ \text{=\$}\left(832\right)\end{array}$

Working note (3):

$\begin{array}{c}\begin{array}{l}\text{Standard direct }\\ \text{labor hours}\text{for }\\ \text{actual production}\end{array}\}=\left(\frac{\text{Number of lines generated}}{\text{Standard labor time per hour}}\right)\\ =\frac{5,650\text{lines}}{25\text{lines per hour}}\\ =226\text{hours}\end{array}$

Conclusion

The direct labor time variance is $(832) and it is a favorable variance, since the actual direct labor hour is lesser than the standard direct labor hour.

To determine

Compute the direct labor rate variance as a result of the bonus.

Explanation of Solution

Determine the direct labor rate variance.

$\begin{array}{c}\text{Direct labor rate variance = }\left[\left(\begin{array}{l}\text{Actual rate per hour}-\\ \text{Standard rate per hour}\end{array}\right)\text{× Actual hours (1)}\right]\\ =\left[\left(\text{\$40}-\text{\$32}\right)\text{×200 hours}\right]\\ \text{=\$8×200 hours}\\ \text{=\$1,600}\end{array}$

Conclusion

The direct labor rate variance is $1,600 and it is an unfavorable variance, since the actual rate per hour is more than the standard rate per hour.

To determine

Compute the labor time variance in the first week if a new employee had been hired from the employment firm.

Explanation of Solution

Determine the direct labor time variance:

$\begin{array}{c}\begin{array}{l}\text{Actual labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours (4)}-\\ \text{Standard direct labor hours (3)}\end{array}\right)\text{× Standard rate per hour}\right]\\ =\left[\left(240\text{hours}-226\text{ hours}\right)\text{× \$32 per hour}\right]\\ \text{=}\left[\text{14 hours× \$32}\text{per hour}\right]\\ \text{=\$448}\end{array}$

Working note (4):

$\begin{array}{c}\text{Actual labor hours=}\left(\begin{array}{l}\text{Number of employees}\times \text{Number}\\ \text{of labor hours per week}\end{array}\right)\\ =6\text{employees}\times 40\text{hours}\\ =\text{240}\text{hours}\end{array}$

Conclusion

The direct labor time variance is $448 and it is an unfavorable variance, since the actual direct labor hour is more than the standard direct labor hour.

To determine

State the decision that would be better, paying the bonus, or hiring another programmer.

Answer to Problem 5PA

Hiring an extra employee is the better decision when compared to paying the bonus as hiring another programmer is less costly.

Explanation of Solution

Determine the total direct labor cost time variance.

$\begin{array}{c}\text{Total direct labor cost variance = }\left(\begin{array}{l}\text{Direct labor rate variance}+\\ \text{Direct labor time variance}\end{array}\right)\\ \text{= \$(832)+\$1,600}\\ \text{=\$}768\end{array}$

The direct labor cost variance for paying the bonus is $768 and it is an unfavorable variance, since the direct labor rate variance is more than the direct labor time variance. The labor cost variance in hiring another programmer would have been $448 which is unfavorable, which is less than the cost of paying the bonus.

Conclusion

Hence, the net benefit of hiring another programmer when compared to paying the bonus is $320$\left(\$768-\$448\right)$.