Question

Parent Golf produces customized golf clubs. The process is labor intensive. The speed at which a club can be built depends on the skill level of the individual worker. Management

has established a standard of 4.0 labor hours per club. The standard wage rate is $17 per

hour. During a recent month, 1,500 clubs were produced. Management was pleased that

only 5,100 labor hours were required. However total wages amounted to $122,400. How should we analyze this situation in order to determine how well Parent Golf did during

the month?

a. Calculate a flexible budget for total labor cost for the month based on the actual

production of 1,500 golf clubs Show your calculations.

b. What was the actual number of labor hours per club required during the month in question? What was the actual labor

cost per hour experienced?

c. Determine the total labor variance experienced (actual minus budget). Was it

favorable or unfavorable? How should we break down of this amount between labor

efficiency (usage) variance and labor rate (price) variance? Graph your result!

d. Assuming that the higher labor rate was due to hiring more skillful workers

who are able to work faster, how low should the actual number of hours per club be to justify the higher wages being paid? Show your calculations.

e. You hear from one of your friends that due to the unexpectedly high productivity of the new people, there were critical materials shortages during the month

that interrupted production. While it is true that 1,500 clubs were finished, there are another 500 in the factory that are 90% complete and just waiting for the final 10%

of work. How should this change your answer in 1 above? Show your calculations.

Answer 1

Answer:
a.	The flexible budget for the total labor cost for the month based on the actual production of 1,500 golf clubs would be as follows:
	Standard wage rate per hour	$                       17
	Standard labor hours per club	4	Hours
	Total labor cost for actual production of 1500 clubs would be	$            1,02,000		($17*4 hours* 5,100 golf club)
b.	Standard hours required for actual production	6000	Hours	(1500 golf club* 4 hours)
	Actual hours used	5100	Hours
	Actual wage rate per hour	$                       24		($122,400/5100 hours)
c.	Total labor variance experienced	$               20,400	Adverse	($122,400-102,000)
	Labor rate variance	=(Actual rate-Standard Rate)*Actual hours
		=($24-17)*5100
		35700	Adverse
	Labor efficiency variance	=(Actual hours-Standard hours)* Standard rate
		=(5100-6000)*$17
		$               15,300	Favourable
d.	The actual number of hours to justify rate of $24 would be	3	hours	($102,000/$24/1500 clubs