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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Standards for nonmanufacturing expenses
The Radiology Department provides imaging services for Northeast Washington Medical Center. One important activity in the Radiology Department is transcribing digitally recorded analyses of images into a written report. The manager of the Radiology Department determined that the average transcriptionist could type 800 lines of a report in an hour. The plan for the first week in July called for 64,000 typed lines to be written. The Radiology Department has two transcriptionists. Each transcriptionist is hired from an employment firm (hat requires temporary employees to be hired for a minimum of a 40-hour week. Transcriptionists are paid $18.00 per hour. The manager offered a bonus if the department could type more than 70,000 lines for the week, without overtime. Due to high service demands, the transcriptionists typed more lines in the first week of July than planned. The actual amount of lines typed in (he first week of July was 70,400 lines, without overtime. As a result, the bonus caused the average transcriptionist hourly rate to increase to $20.00 per hour during the first week in July.

Instructions

The manager is trying to determine if a better decision would have been to hire a temporary transcriptionist to meet the higher typing demands in the first week of July, 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?

To determine

Concept Introduction:

Direct labor variances:

Direct labor variances refer to the difference between the standard direct labor cost and actual direct labor cost incurred. Direct labor cost variances are categorized into following categories:

  1. Direct labor Rate variance: this variance shows the difference of standard rate and actual rate of labor. The formula to calculate this variance is as follows:
  2.   Direct labor rate variance = (Actual rate – Standard rate) ×Actual hours

  3. Direct labor efficiency variance: this variance shows the difference of standard usage and actual usage of labor. The formula to calculate this variance is as follows:
  4.   Direct labor efficiency variance = (Actual hours – Standard hours)×Standard rate

  5. Direct labor cost variance: this variance shows the difference of standard cost and actual cost of labor. The formula to calculate this variance is as follows:
  6.   Direct labor cost variance = Direct labor rate variance + Direct labor efficiency variance

    Or

    Direct Labor cost variance = Actual Labor cost − Standard Labor Cost

To Calculate:

The Direct Labor Time variance

Explanation

The Direct Labor Time variance is calculated as follows:

    Direct Labor Efficiency Variance:
    Actual hours (E) 80Hours
    Standard ...

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