Exercise 11-4 Direct Labor and Variable Manufacturing Overhead Variances [LO11-2

ID: 2599638 • Letter: E

Question

Exercise 11-4 Direct Labor and Variable Manufacturing Overhead Variances [LO11-2, LO11-3] 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 27 minutes $6.00 $2.70 During August, 9,510 hours of direct labor time were needed to make 19,800 units of the Jogging Mate. The direct labor cost totaled $55,158 for the month. Required: 1. According to the standards, what direct labor cost should have been incurred to make 19,800 units of the Jogging Mate? By how much does this differ from the cost that was incurred? (Round Standard labor time per unit and Standard direct labor rate to 2 decimal places.) 2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculations.)

Explanation / Answer

Number of units manufactured

19,800

Standard labor time per unit

*0.45*

Total standard hours of labor time allowed

8,910

Standard direct labor rate per hour

*$6

Total standard direct labor cost

$53,460

*27 minutes / 60 minutes per hour = 0.45 hours

Actual direct labor cost

$55,158

Standard direct labor cost

53,460

Total variance—unfavorable

$ 1,698

2) Labor rate variance = AH (AR – SR)

9,510 hours ($ 5.80per hour* – $6.00 per hour) = $1,902F

*$55158 / 9510 hours = $5.80 per hour

Labor efficiency variance = SR (AH – SH)

($6 per hour (9,510 hours – 8,910 hours) = $3,600 U