Vary construction company is attempting to use past project data on labor produc
ID: 1839188 • Letter: V
Question
Vary construction company is attempting to use past project data on labor productivity and costs and variance analysis to improve the accuracy of its estimating system. The firm typically analyzes monthly data to aid in its estimation of projects to be bid in the following month. It is currently the end of April, and Vary Construction company has asked you to help it determine various costs to be applied to projects that will be bid and performed in May. April is the first mont in which Vary has gathered comparative data on estimated and actual direct labor hours. For the month of April, 40,000 hours were estimatied; however, 45,000 labor hours were actually used.
The 40,000 estimated hours for April consisted of 30,000 labor hours and 10,000 carpenter hours. The estimated wage rates for April for the two crafts were $8 and $10, respectively. Payroll records indicate that a total of $300,000 was paid to laborers and $98,000 to carpenters during the month of April.This was on the basis of 33,100 actual labor hours and 11,900 carpenter hours.
The firm expects to bid and perform a single project during the month of May. On the basis of calculations made before consideration of April's data, the estimated carpenter hours and labor hours are 20,000 and 30,000 respectively.
Using the variance analysis method assist Vary Construction Company in determining its labor bid price for the May Project.
Explanation / Answer
Labor Variance analysis for the month of April
Labor Variance = standard wages - Actual Wages
Standard wages are the estimates for the month of April
Standard wages = standard rate * total labour hours
= 30000*8 + 10000*10 = $340,000
Actual Wages Paid = $300,000 + $98,000 = $398,000
Labor Variance = $340,000 - $398,000 = $58,000 (Unfavourable)
Actual Rate per labour Hour paid in April = total amount paid / total labour hours
= 300,000/33100 = $ 9.0 per labour hour
Labour rate variance = (standard rate - actual rate) Actual hours
= (8 - 9) 33100 = $33100 (Unfavourable)
Carpenter Rate Variance = (standard rate - actual rate) Actual hours
= (10 - 8.24)11900 = $20944 (Favourable)
Actual Rate per carpenter Hour paid in April = total amount paid / total carpenter hours
= 98,000/11900 = $ 8.24 per carpenter hour
Carpenter Rate Variance = (standard rate - actual rate) Actual hours
= (10 - 8.24)11900 = $20944 (Favourable)
Based on the April data Only Labour variance rate is unfavorable and carpenter variance rate is favorable The Vary Construction Company the may bid for wages of $9 per labor hour and $10 per carpenter hour.
The standard bid amount will be = $9*30000 + $10*20000 = $470,000.
Labor bid price for the May project = $470,000
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