Question

I need for you to look at a couple of things and give me some guidance.

The workers in the assembly department are paid three different wages. Senior Assemblers, who have been with the company for more than five years, are paid $15 per hour. Experienced Assemblers, who have been with the company between one and five years, are paid $12 per hour. Novice Assemblers, who have been with the company less than one year, are paid $10 per hour. Assemblers from each class can perform the assembly tasks necessary to assemble a unit of XYZ but with more or less efficiency. I expect it to take four (4) direct labor hours to assemble each unit of XYZ.

When we developed the standard labor cost for the assembly department, we expected that 20% of the hours worked in the department would be performed by Senior Assemblers, 50% by Experienced Assemblers, and 30% by Novice Assemblers.

During May, 800 units of XYZ were produced using 3,360 hours of assembly labor. Because of an unforeseen expansion in the demand for XYZ, this was many more hours than expected. Therefore, Senior Assemblers worked 15% of the labor hours, Experienced Assemblers worked 45%, and Novice Assemblers worked 40%. Please address the following:

Determine the standard assembly labor cost per hour.

Determine the actual assembly labor cost per hour during May.

Compute the direct labor rate and efficiency variances for May. Don't forget to indicate whether those variances are unfavorable or favorable.

Based on the information given, what action, if any, would you expect me to take in response to the labor variances that you computed in part (3)?

Also, I am concerned about what’s going on in the cafeteria. The standard cost of mozzarella cheese that goes into our pizza is 1/2 pound per pizza @ $2.50 per pound. The standard price per pound is the price that we have paid for cheese for the last few months. We normally use about 2,000 pounds of mozzarella each month. In the past, mozzarella has been purchased 1,000 pounds at a time. For May, our purchasing agent was offered a 6% discount on the price per pound, to $2.35, if we purchased 2,000 pounds at a time. He chose to do so.

Compute the direct materials price variance and indicate favorable or unfavorable on the purchase of 2,000 pounds of cheese at $2.35 instead of the standard price of $2.50. NOTE: I am asking for just the PRICE variance.

In the past, about 1% of the cheese was thrown out due to spoilage. In May, because of the larger quantity purchased at once, 10% of the cheese spoiled and was thrown out. Did the favorable direct materials price variance that you computed in part (1) reflect a situation that was favorable from the standpoint of the company? Support your answer with computations. (Hint: think about the money lost due to the spoilage, both under the old way [1,000 pounds at a time times 2] or the new way [2,000 pounds at a time].)

During May, 1,800 pounds of cheese were used to produce 3,580 pizzas. Compute the May direct materials quantity variance and indicate favorable or unfavorable. NOTE: I am asking for just the QUANTITY variance.

What role does spoilage play in your answer to part (3)?

Answer 1

1. Standard assembly labor cost per hour : [4 hrs. x 20% x $ 15 + 4 hrs. x 50 % x $ 12 + 4 hrs. x 30% x $ 10 ] / 4 hrs. = ($ 12 + $ 24 + $ 12) / 4 hrs. = $ 12 per hour.

2. Actual assembly labor cost per hour : [ 3,360 x 15 % x $ 15 + 3,360 x 45 % x $ 12 + 3,360 x 40 % x $ 10] / 3,360 hrs. = $ ( 7,560 + 18,144 + 13,440) / 3,360 = $ 11.65 per hour.

3. Direct labor rate variance = ( Standard rate per hour - Actual rate per hour) x Actual hours used = $ ( 12.00 - 11.65) x 3,360 = $ 1,176 Favorable.

4. Direct labor efficiency variance = ( Standard hours allowed for actual output - Actual hours used) x Standard rate per hour = ( 800 x 4 - 3,360) x $ 12 = $ 1,920 Unfavorable.

5. Direct materials price variance = ( Standard price - Actual price) x Quantity Purchased = $ ( 2.50 - 2.35) x 2,000 = $ 300 Favorable.

6. Materials quantity variance = ( Standard quantity allowed for actual output - Actual quantity used ) x Standard price per pound = ( 3,580 x 0.5 - 1,800) x $ 2.50 = $ 25 Unfavorable.