SkyInc provides in-flight meals for a number of major airlines. One of the compa

Question

SkyInc provides in-flight meals for a number of major airlines. One of the company’s products is stuffed cannelloni with roasted pepper sauce, fresh baby corn, and spring salad. During the most recent week, the company prepared 6,000 of these meals using 1,150 direct labour-hours. The company paid these direct labour workers a total of $11,500 for this work, or $10 per hour.

According to the standard cost card for this meal, it should require 0.20 direct labour-hours at a cost of $9.50 per hour.

Required

What direct labour cost should have been incurred to prepare 6,000 meals? How much does this differ from the actual direct labour cost?

Break down the difference computed above into a labour rate variance and a labour efficiency variance.

Explanation / Answer

standard cost to prepare the meal at actual quantity

6,000 x 0.20 = 1,200 x $9.50 = $11,400

actual incurred = 11500

labor rate variance

11,500 actual - (1,150 actual hours x $9.50 standard rate) = -$575 u

labor efficiency variance =(1,150 actual hours x $9.50 standard rate) - $11,400 = 475 f

The variance containes two components, an unfavorable rate variance, offset by a favorbale efficiency variance. The rate variance is calculated by comparing the actual amount paid to the actual hours at the standard rate.

Add the labor rate variance of $575 and the efficiency variance of ($475) and you get a total variance of $100 above the standard labor cost.

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