Exercise 8-10 Direct Labor and Variable Manufacturing Overhead Variances [LO8-5,

Question

Exercise 8-10 Direct Labor and Variable Manufacturing Overhead Variances [LO8-5, LO8-6] Erie Company manufactures a small mp3 player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate mp3 player are as follows: Standard Hours Standard Rate per Hour Standard Cost 24 minutes $6.00 $2.40 During August, 8,550 hours of direct labor time were needed to make 19,400 units of the Jogging Mate. The direct labor cost totaled $50,445 for the month. Required: 1. According to the standards, what direct labor cost should have been incurred to make 19,400 units of the Jogging Mate? By how much does this differ from the cost that was incurred? (Round Standard labor time per unit to 2 decimal places.) 2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). ) 3. The budgeted variable manufacturing overhead rate is $4.1 per direct labor-hour. During August, the company incurred $37,620 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month. (Do not round intermediate calculations and round your final answers to nearest whole dollar. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Explanation / Answer

1.) According to the standards, direct labor cost that should have been incurred to make 19,400 units of the Jogging Mate = 19400 units * $2.40 per unit = $46560

Actual Cost = $50445

This differs actual cost by $3885.

2.) Labour Rate variance = (Actual rate - Standard rate) x Actual hours worked

= (50445/8550- 6) * 8550 = 855 (F)

Labour efficiency variance = (Actual hours - Standard hours) x Standard rate

= (8550 - 19400*24/60) * 6 = 4740 (U)

3.) Variable overhead rate variance = Actual hours worked x (Actual overhead rate - standard overhead rate)

8550 * (37620/8550 - 4.1) = 2565 (U)

Variable overhead efficiency variance = Standard overhead rate x (Actual hours - standard hours)

= 4.1 * (8550 - 19400*24/60) = 3239 (U)

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