Petra\'s Music manufaccures harmonicas. Petra uses standard costs to judge perfo

Question

Petra's Music manufaccures harmonicas. Petra uses standard costs to judge performance. Recently, a clerk mistakenly threw away some of the records, and Petra has only partial data for October. She knows that the direct labor flexible budget variance for the month was $2,050 F and that the standard labor rate was $10 per hour. The actual labor rate was S9.50 per hour. The standard direct labor hours for actual October out put were 6,000 Requirements 1. Find the acu number of direct labor hours worked during October. First, calculate the standard labor cost. Next, calculate the actual labor cost by subtracting the favorable flexible budget variance of S2,050 from the standard labor cost. Finally, divide the acrual labor cost by the actual labor rate per hour. (p. 1172) 2. Compute the direct labor price and efficiency variances. Do these variances suggest the manager may have made a trade-off? Explain

Explanation / Answer

1) Standard labor cost = Standard labor hours*Standard labor rate per hour

= 6,000 hours*$10 per hour = $60,000

Actual Labor cost = Standard labor cost - Direct labor flexible budget variance

= $60,000-$2,050 = $57,950

Actual direct labor hours = Actual Labor cost/Actual labor rate per hour = $57,950/$9.50 = 6,100 hours

2) Direct labor price variance = (Standard rate per hour - Actual labor rate per hour)*Actual labor hours

= ($10-$9.50)*6,100 hours = $3,050 Favourable

Direct labor efficiency variance = (Standard labor hours - Actual labor hours)*Standard rate per hour

= (6,000-6,100)*$10 per hour = $1,000 Unfavourable

The favourable direct labor price variance combined with unfavourable direct labor efficiency variance suggests that mangers may have used lower paid, less skilled workers who performed less efficiently. But the net effect is positive ($3,050 F + $1,000 U = $2,050 F), so this appears to have been a wise tradeoff.

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