After evaluating Null Company’s manufacturing process, management decides to est

Question

After evaluating Null Company’s manufacturing process, management decides to establish standards of 3 hours of direct labor per unit of product and $16.80 per hour for the labor rate. During October, the company uses 21,500 hours of direct labor at a $365,500 total cost to produce 7,400 units of product. In November, the company uses 23,800 hours of direct labor at a $406,980 total cost to produce 7,800 units of product.

   

After evaluating Null Company’s manufacturing process, management decides to establish standards of 3 hours of direct labor per unit of product and $16.80 per hour for the labor rate. During October, the company uses 21,500 hours of direct labor at a $365,500 total cost to produce 7,400 units of product. In November, the company uses 23,800 hours of direct labor at a $406,980 total cost to produce 7,800 units of product.

After evaluating Null Company's manufacturing process, management decides to establish standards of 3 hours of direct labor per unit of product and $16.80 per hour for the labor rate. During October, the company uses 21,500 hours of direct labor at a $365,500 total cost to produce 7,400 units of product. In November the company uses 23,800 hours of direct labor at a $406,980 total cost to produce 7,800 units of product. (1) Compute the direct labor rate variance, the direct labor efficiency variance, and the total direct labor cost variance for each of these two months. October Actual Cost Standard Cost AH XAR. November Actual Cost Standard Cost

Explanation / Answer

1) Calculation of labor variances

For the Month of October

Actual rate per labor hour = Actual Labor cost/Actual Hours

= $365,500/21,500 hrs = $17 per hour

Actual Cost = Actual Hours*Actual Rate

= 21,500 hrs*$17 per hour = $365,500

Standard Cost for Actual Hours = Actual Hours*Standard Rate

= 21,500 hrs*$16.80 per hour = $361,200

Standard Cost for Standard Hours = Standard Hours*Standard Rate

= (7,400 units*3 hrs per unit)*$16.80 per hr = $372,960

Direct Labor Rate Variance = Standard Cost for Actual Hours - Actual Cost

= $361,200 - $365,500 = ($4,300) Unfavorable

Direct Labor Efficiency Variance = Standard Cost for Standard Hours - Standard Cost for Actual Hours

= $372,960 - $361,200 = $11,760 Favorable

Total Direct Labor Cost Variance = Labor Rate Variance+Labor Efficiency Variance

= ($4,300)+$11,760 = $7,460 Favorable

For the Month of November

Actual rate per labor hour = Actual Labor cost/Actual Hours

= $406,980/23,800 hrs = $17.10 per hour

Actual Cost = Actual Hours*Actual Rate

= 23,800 hrs*$17.10 per hour = $406,980

Standard Cost for Actual Hours = Actual Hours*Standard Rate

= 23,800 hrs*$16.80 per hour = $399,840

Standard Cost for Standard Hours = Standard Hours*Standard Rate

= (7,800 units*3 hrs per unit)*$16.80 per hr = $393,120

Direct Labor Rate Variance = Standard Cost for Actual Hours - Actual Cost

= $399,840 - $406,980 = ($7,140) Unfavorable

Direct Labor Efficiency Variance = Standard Cost for Standard Hours - Standard Cost for Actual Hours

= $393,120 - $399,840 = ($6,720) Unfavorable

Total Direct Labor Cost Variance = Labor Rate Variance+Labor Efficiency Variance

= ($7,140)+($6,720) = ($13,860) Unfavorable

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