Question

In: Accounting

Adam Holmes is the Processing Manager of Empire Mortgage Company, a firm that processes loan applications...

Adam Holmes is the Processing Manager of Empire Mortgage Company, a firm that processes loan applications for a number of regional builders. Home buying and therefore mortgage processing is a highly seasonal business, and requires temporary staff during busy processing periods. Holmes hires staff on a monthly basis from two different temporary staffing firms - Professional Temps (PT) and Support on Demand (SD). In June, Empire hired 14 staff members from PT and 10 from SD. PT is a more established firm and SD is a newly organized firm in the staffing market. Holmes has compiled the following information for June:

Budgets for June

PT staff

SD staff

Budgeted hourly rate

$50

$45

Budgeted time per app. (hours)

1.2

1.4

Actual results for June

PT staff

SD staff

Actual hourly rate

$52

$47

Actual time per app. (hours)

1.4

1.2

Number of actual apps completed

2,604

1,600

Questions:

  1. Determine the labor rate and efficiency variances for (a) the 14 PT staff and (b) the 10 SD staff hired in June.
  2. Comment on the efficiency of the PT and SD staff hired by Empire Mortgage.

Solutions

Expert Solution

Empire Mortgage Company

Calculation of Labour variances:

Formulae:

Labour rate variance = (Standard Rate – Actual Rate) x Actual payment hours

Labour Efficiency variance = (Standard hours – Actual hours) x Standard rate

Solution (a)

Labour variances for 14 PT staff:

Labour rate variance = (Standard Rate – Actual Rate) x Actual payment hours

                                 = (Standard Rate – Actual Rate) x (Actual time per app.) x (number of                                                             apps. completed)

                                      = ($50 - $52) x 1.40 x 2,604

                                      = $7291.20 (Adverse)

Labour Efficiency variance = (Standard hours – Actual hours) x Standard rate

                                    = [(Standard hours per app. X number of app.) – (Actual time per App. X

                                                                                                          number of apps.)] X Std. rate

                                   = [(1.20 X 2,604) – (1.40 X 2,604)] X $50

                                  = [3,124.80 – 3,645.60] X $50

                                   =26,040 (Adverse)

Labour Cost variance = labour rate variance + labour efficiency variance

                                      = $7,291.20 (Adverse) + $ 26,040 (Adverse)

                                      = $33,331.20 (Adverse)

Solution (b)

Labour variances for 10 SD staff:

Labour rate variance = (Standard Rate – Actual Rate) x Actual payment hours

                                 = (Standard Rate – Actual Rate) x (Actual time per app.) x (number of                                                             apps. completed)

                                      = ($45 - $47) x 1.20 x 1,600

                                      = $3840 (Adverse)

Labour Efficiency variance = (Standard hours – Actual hours) x Standard rate

                                    = [(Standard hours per app. X number of app.) – (Actual time per App. X

                                                                                                          number of apps.)] X Std. rate

                                   = [(1.40 X 1,600) – (1.20 X 1,600)] X $45

                                  = [2,240 – 1,920] X $45

                                   =14,400 (Favourable)

Labour Cost variance = labour rate variance + labour efficiency variance

                                      = $3,840 (Adverse) + $ 14,400 (Favourable)

                                      = $10,560 (Favourable)
Comments:

  • Labour Rate Variance: Temporary staff hired by processing manager is paid higher wage rate vis-a-vis budgeted wage rate which has resulted in adverse Labour rate variance both in the case of PT staff and SD staff.
  • Labour Efficiency variance: Whereas actual time consumed by PT staff is more than the budgeted time (reflecting less efficiency) resulting in adverse labour efficiency variance, the actual time consumed by SD staff is less than Budgeted time (a measure of greater efficiency) which has resulted in favourable labour efficiency variance and an overall favourable labour cost variance in their case.

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