Frog Machinery, Inc is experimenting with a new labor mix for this month (March,

Question

Frog Machinery, Inc is experimenting with a new labor mix for this month (March, 2015). The
company's standard cost per unit information is as follows:

                                                         Standard Quantity                           Standard Rate
Direct Materials                                   2.5 ounces                                     $20.00 per ounce

Direct Labor                                        2 Hours                      $25.00 per hour

Variable Mf.OH                                   2 Hours                                           $3.50 per hour

In March, the company employs 100 assembly workers to work on production of Machine Yellow Frog .
They worked an average 190 hours per person at an average rate of $22 per hour.

In the past (Feb and before), the 100 assembly worker labor mix consist of 50 senior workers and
50 junior workers. In this month, the company is experimenting with a new labor mix, changing it to
fewer senior workers and more junior workers.
At the end of this month,9,000 machine Yellow Frog are produced.

What is labor spending variance and labor efficiency variance for Frog Machinery in March?

Would you recommend Frog Machinery to continue the change or not?

A.   Yes, the new labor mix has lower rate and higher working efficiency.

B.    No, the new labor mix has higher rate and higher working efficiency, but cost savings
associated with greater efficiency cannot be offset by rate increase.
C.    Yes, the new labor mix has lower rate and lower working efficiency, but cost savings attached
to low rates exceeds cost increments associated with greater efficiency.
D.   Yes, the new labor mix has lower rate and lower working efficiency. Cost savings from lower
rate can offset higher cost associated with more hours worked.
E.    No, the new mix has lower rate and lower working efficiency, but the cost savings associated
with lower rate cannot be offset by the lower efficiency.

Explanation / Answer

What is labor spending variance and labor efficiency variance for Frog Machinery in March? Labour Spending Variance=Actual Hours*Standard Rate-Actual Hours*Actual Rate 19000*25-19000*22 57000 Favourable Labour Efficiency Variance=Standard Hours*Standard Rate-Actual Hours*Standard Rate 18000*25-19000*25 -25000 Unfavourable D.   Yes, the new labor mix has lower rate and lower working efficiency. Cost savings from lower rate can offset higher cost associated with more hours worked.

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