Question

Cost Accounting: A managerial emphasis by Horngren (15th ed). Chapter 7, Problem 39P. Please assist with the question. Thanks.

Direct labor variances: price, efficiency, mix, and yield. Trevor Joseph employes two workers in his guitar-making business. The first worker, George, has been making guitars for 20 years and is paid $30 per hour. The second worker, Earl, is less experienced and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The budgeted direct labor quantities and prices for one guitar are as follows:

Quantity Price per Hour of Labor Cost for One Guitar
George 6 hours $30 per hour $180
Earl 4 hours $20 per hour $80

That is, each guitar is budgeted to require 10 hours of direct labor, composed of 60% of George's labor and 40% of Earl's, although sometimes Earl works more hours on a particular guitar and George less, or vice versa, with no obvious change in the quality or function of the guitar. During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as follows:

George (145 hours) $4,350

Earl (108 hours) 2,160

Total actual direct labor cost $6,510

1. What is the budgeted cost of direct labor for 25 guitars? 2. Calculate the total direct labor price and efficiency variances. 3. For the 25 guitars, what is the total actual amount of direct labor used? What is the actual direct labor input mix percentage? What is the budgeted amount of George's and Earl's labor that should have been used for the 25 guitars? 4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the direct labor efficiency variance? What do these variances tell you?

Answer 1

1	What is the budgeted cost of direct labor for the 25 guitars?
		Hours	Input Mix	Hourly Pay	Budgeted Cost Per Guitar
	George	6	60%	$30	$180
	Earl	4	40%	$20	$80
		10	100%		$260
	Total Budgeted Cost	260*25 guitars	$6,500

2	total direct labor price and efficiency variance.
	Direct Labor price variance for each unit	=	Actual Price of input	-	Budgeted price of input	x	Actual Quantity of input
	George	=	30	-	30	x	145	=	0
	Earl	=	20	-	20	x	108	=	0
	Total Direct labor price variance = 0

Total direct labor efficiency variance can also be computed as
Direct Labor efficiency variance for each unit	=	Actual qty of input	-	Budgeted qty of input allowed for actual output	x	Budgeted price of input
George	=	145	-	150	x	30	=	150	Favourable
Earl	=	108	-	100	x	20	=	160	unfavourable
Total Direct labor efficiency variance = $10 U

3		Actual Quantity of input	Actual Mix	Budgeted quantity of input for actual output	Budgeted Mix
	George	145	57.31%	6 hours * 25 units = 150 hours	60
	Earl	108	42.69%	4 hours*25 units = 100 hours	40
		253	100.00%	250 hours	100

4

Direct labor yield variance for each unit

=

Actual total quantity of all direct labor inputs used

-

Budgeted total quantiy of all direct labor inputs allowed for each output

x

Budgeted direct labor input mix percentage

x

Budgeted price of direct labor inputs

=

George

=

253

-

250

x

0.6

x

30

=

54

U

Earl

=

253

-

250

x

0.4

x

20

=

24

U

Total Direct labor yield variance

=

78

U

	Actual Quantity (Hrs.)		Actual Quantity (Hrs.)
	Actual Mix		Budgeted Mix
George	Budgeted Price		Budgeted Price
	253*57.31%*30		253*60%*30
	4349.829		4554		-204.171	F
Earl	253*42.69%*20		253*42.69%*20
	2160.114		2024		136.114	U
	Total Mix Variance				-68.057	F

The favorable mix variance arises from using more of the cheaper laborer (Earl) and less of

The yield variance indicates that the guitars required 1.2% more total inputs (253 hours) than expected (250 hours) for the production of 25 guitars. It is likely that Earl, who is lessexperienced, worked more slowly than George, which caused the unfavorable yield variance