Question

Javonte Co. set standards of 2 hours of direct labor per unit of product and $16.10 per hour for the labor rate. During October, the company uses 13,000 hours of direct labor at a $211,900 total cost to produce 6,700 units of product. In November, the company uses 17,000 hours of direct labor at a $277,950 total cost to produce 7,100 units of product.

AH= Actual Hours
SH =Standard Hours
AR =Actual Rate
SR =Standard Rate

Required:
a. Compute the direct labor rate variance, the direct labor efficiency variance, and the total direct labor cost variance for each of these two months. Classify each variance as favorable or unfavorable.
b. Javonte investigates variances of more than 5% of actual direct labor cost. Which direct labor variances will the company investigate further?

Answer 1

Answer:

Part a.

October Labor Rate Variance   (2600) unfavorable

October Labor Efficiency Variance   6440 favorable

Labor Cost Variance  For October  3840 favorable

November Labor Rate Variance  (4250) unfavorable

November Labor Efficiency Variance (45080) unfavorable

Labor Cost Variance  For November 49330 unfavorable

Part b.

Direct labor Efficiency variance for November will be investigated further as it varies more than 5 % 0f actual direct labor cost.

Explanation:

Direct Labor Rate Variance For October

                                           Time *        Rate    =        Amount

Actual Hours Worked       13000 *      16.3 actual              = 211900

Actual Hours Worked      13000 * 16.10 standard         =  209300      

Labor Rate Variance                         0.2                           (2600) unfavorable

When actual rate is greater than the standard rate the variance is unfavorable.

Direct Labor Rate Variance For November

                                           Time *        Rate    =        Amount

Actual Hours Worked       17000 *      16.35 actual              = 277950

Actual Hours Worked      17000 * 16.10 standard         =  273700      

Labor Rate Variance                         0.25                           (4250) unfavorable

When actual rate is greater than the standard rate the variance is unfavorable.

Direct Labor Efficiency Variance for October

                                           Time *        Rate    =        Amount

Actual Hours Worked       13000 *      16.1 standard             = 209300

Standard Hours Allowed      13400 * 16.10 standard         =  215740  

                                            ( 2* 6700)                                                        

Labor Efficiency Variance              400                               6440 favorable

When actual hours are less than the standard hours allowed the variance is favorable.

Direct Labor Efficiency Variance for November

                                           Time *        Rate    =        Amount

Actual Hours Worked       17000 *      16.1 standard             = 273700

Standard Hours Allowed      14200 * 16.10 standard         =  228620

                                            ( 2* 7100)                                                        

Labor Efficiency Variance            2800                           (45080) unfavorable

When actual hours are more than the standard hours allowed the variance is unfavorable.

Labor Cost Variance  For October

Standard hours * standard rate- Actual hours * actual rate

13400 * 16.10-  13000 *      16.3

= 215740  -211900

=3840 favorable

Labor Cost Variance  For November

Standard hours * standard rate- Actual hours * actual rate

14200 * 16.1 -  17000 * 16.35

= 228620  - 277950

=49330 unfavorable

Direct labor Efficiency variance for November will be investigated further as it varies more than 5 % 0f actual direct labor cost.

45080> 5% of 277950

5% of 277950 = 13897.5

13897.5 > 45080