Question

The Foster Insurance company developed standard times for processing claims. When a claim was received at the processing center, it was first reviewed and classified as simple or complex. The standard time for processing was: Simple claim 30 minutes Complex claim 3.5 hours Employees were expected to be productive 8 hours per day. Compensation costs were $93 per day per employee. During April, which had 22 working days, the following number of claims were processed: Simple claims 3,100 processed Complex claims 630 processed

Required:

1. Calculate the number of workers that should have been available to process April claims. (Do not round intermediate calculations.)
2. Assume that 25 workers were actually available throughout the month of April. Calculate a labor efficiency variance expressed as both a number of workers and a dollar amount for the month. (Round "Efficiency variance, in number of workers" to nearest whole number. Use the rounded number in subsequent calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Answer 1

Total time available with one worker in April = 22x8 = 176 hours

Total time needed for all claims = 3100x0.5+630x3.5 = 3755 hours

Number of workers needed = 3755/176 = 21.33 =22 workers

If 25 workers were available, labour efficiency variance = 21.33-25 =-3.67 =3

The round off is to full 22 workers, as with 21 workers, the work will be left behind.

Cost incurred with 25 workers = 25x93 =2325

Cost that should have incurred with 22 workers = 22x93 =2046

cost variance = 2046-2325 =-279

The effect is negative in all cases because the variance is negative and more cost / labour is incurred than that needed.