Chapter 10, Problem 4E

EXERCISE 10-4 Direct Labor and Variable Manufacturing Overhead Variances LO10-2, LO10-3
Erie 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:

Standard	Standard Rate	Standard
Hours	per Hour	Cost
18 minutes	$17.00	$5.10

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?
2. What is the standard labor cost allowed (SH x SR) to make 20,000 Jogging Mates?
3. What is the labor spending variance?
4. What is the labor rate variance and the labor efficiency variance?
5. The budgeted variable manufacturing overhead rate is $4 per direct labor-hour. During August, the company incurred $21,850 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.

To determine

The standard labour hours allowed for producing actual output of 20,000jogging mates (units).

Answer to Problem 4E

Solution: TheStandard Labour hours allowed for producing actual output of 20,000 unit shall be as under:

Standard Labour hours allowed (SH) = Actual Output × Standard labour hours allowed per unit of output

Standard Labour hours allowed (SH) = 20,000 units × 0.30 hour per unit = 6,000 hours

Explanation of Solution

Given: The following information is available in the given problem;

Actual output: 20,000 units

Standard labour hours allowed per unit of output: 18 minutes (i.e. 18/60) =0.30 hour per unit

Formula: The formula used in the given problem is as follows:

Standard Labour hours allowed (SH) = Actual Output × Standard labour hours allowed per unit of output

Calculation: The Standard Labour hours allowed for producing actual output of 20,000 unit shall be ass under:

Standard Labour hours allowed (SH) = Actual Output × Standard labour hours allowed per unit of output

Standard Labour hours allowed (SH) = 20,000 units × 0.30 hour per unit = 6,000 hours

The Standard Labour hours allowed for actual output is computed by multiplying the actual output with the standard labour hours allowed per unit of output.

To determine

Standard Labour cost for actual output.

Answer to Problem 4E

Solution: The standard cost for actual output shall be calculated as follows:

Standard cost for actual output = Standard Labour hours allowed for actual output × Standard rate per hour

Standard cost for actual output = 6,000 hours × $17 per hour = $102,000

Explanation of Solution

Given: The following information is available in the given problem;

Actual output: 20,000 units

Standard labour hours allowed for actual output: 6,000 hours

Standard rate per hour: $17.00 per hour

Formula: The formula used in the given problem is as follows:

Standard cost for actual output = Standard Labour hours allowed for actual output × Standard rate per hour

Calculation: The standard cost for actual output shall be calculated as follows:

Standard cost for actual output = Standard Labour hours allowed for actual output × Standard rate per hour

Standard cost for actual output = 6,000 hours × $ 17.00 per hour = $102,000

The Standard labour cost for actual output shall be computed by multiplying the standard labour hours allowed with standard labour rate per hour.

To determine

Labour spending variance to be computed.

Answer to Problem 4E

Solution: The Labour spending variance shall be computed as under:

Labour Spending variance = Standard labour cost allowed for actual output- Actual labour cost

Labour Spending Variance = $102,000- $102,350 = $350 Unfavorable

Explanation of Solution

Given: The following information is available in the given problem;

Actual cost for output: $102,350

Standard cost allowed for actual output: $102,000

Formula: The formula used in the given problem is as follows:

Labour Spending variance = Standard labour cost allowed for actual output- Actual labour cost

Calculation: The Labour spending variance shall be computed as under:

Labour Spending variance = Standard labour cost allowed for actual output- Actual labour cost

Labour Spending Variance = $102,000- $102,350= $350 Unfavorable

The Labour spending variance is the difference between standard labour cost and actual cost incurred on labour. If the difference is positive, it will be favorable situation and if it is negative, it will be unfavorable situation.

To determine

Labour rate and Labour efficiency variance to be computed.

Answer to Problem 4E

Solution: The Labour rate and labour efficiency variance shall be computed as under:

Labour rate variance = Actual Labour hours worked (Standard rate per hour − Actual rate per hr)

=5,750 hours ($17.00 per hour - $17.80 per hour) = $4,600 unfavorable

Labour Efficiency Variance = Standard rate per hour (Standard hours - Actual labour hours)

= $17.00 per hour (6,000 hours − 5,750 hours) = $ 4,250 favorable

Explanation of Solution

Given: The following information is available in the given problem;

Actual cost for output: $102,350

Standard cost allowed for actual output: $102,000

Actual hours used: 5,750 hours

Standard hours allowed: 6,000hours

Standard rate per hour: $17.00 per hour

Formula: The formula used in the given problem is as follows:

Labour rate variance = Actual Labour hours worked (Standard rate per hour − Actual rate per hr)

Labour Efficiency Variance = Standard rate per hour (Standard hours - Actual labour hours)

Calculation: The Labour rate and labour efficiency variance shall be computed as under:

Labour rate variance = Actual Labour hours worked (Standard rate per hour − Actual rate per hr)

=5,750 hours ($17.00 per hour - $17.80 per hour) = $4,600 unfavorable

Labour Efficiency Variance = Standard rate per hour (Standard hours - Actual labour hours)

= $17.00 per hour (6,000 hours − 5,750 hours) = $ 4,250 favorable

The Labour rate variance recognize the difference due to labour rate and Efficiency variance recognizes the difference of hours worked. The sum of both the variance shall be equal to labour spending variance.

Note: Actual labour rate per hour shall be computed as follows:

Actual Labour rate per hour: Actual labour cost ÷ Actual hours worked

= $102,350 ÷ 5,750 hours = $17.80 per hour

To determine

Variable overhead rate and efficiency variance to be computed.

Answer to Problem 4E

Solution: The Variable overhead rate and efficiency variance shall be computed as under:

Variable Overheads rate variance = Actual hours worked (Standard overhead rate per hour − Actual overhead rate per hour)

=5,750 hours ($4.00 per hour - $3.80 per hour) = $1,150 favorable

Variable overhead Efficiency Variance = Standard rate per hour (Standard hours - Actual hours)

= $4.00 per hour (6,000 hours − 5,750 hours) = $ 1,000 favorable

Explanation of Solution

Given: The following information is available in the given problem;

Actual cost for output: $21,850

Standard overhead cost allowed per hour: $4.00 per hour

Actual hours used: 5,750 hours

Standard hours allowed: 6,000hours

Formula: The formula used in the given problem is as follows:

Variable Overheads rate variance = Actual hours worked (Standard overhead rate per hour − Actual overhead rate per hour)

Variable overhead Efficiency Variance = Standard rate per hour (Standard hours - Actual hours)

Calculation: The Variable overhead rate and efficiency variance shall be computed as under:

Variable Overheads rate variance = Actual hours worked (Standard overhead rate per hour − Actual overhead rate per hour)

=5,750 hours ($4.00 per hour - $3.80 per hour) = $1,150 favorable

Variable overhead Efficiency Variance = Standard rate per hour (Standard hours - Actual hours)

= $4.00 per hour (6,000 hours − 5,750 hours) = $ 1,000 favorable

The Variable overhead rate variance recognize the difference due to overhead rate and Efficiency variance recognize the difference of hours worked. The sum of both the variance shall be equal to Variable overhead spending variance.

Note: Actual variable overheads rate per hour shall be computed as follows:

Actual Variable overhead rate per hour: Actual variable overheads cost ÷ Actual hours worked

= $21,850 ÷ 5,750 hours = $3.80 per hour

Conclusion

To conclude, it can be said that thespending variance is the sum total of both the factors i.e. rate variance and efficiency variance.