Question

Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:

Leather (3 strips @ $4)	$12.00
Direct labor (0.75 hr. @ $12)	9.00
Total prime cost	$21.00

During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at $4.20 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,400 hours at $13.00 per hour.

Required:

1. Break down the total variance for labor into a rate variance and an efficiency variance using the columnar and formula approaches.

Rate variance	$	Unfavorable
Efficiency variance	$	Unfavorable
Total variance	$	Unfavorable

Answer 1

Direct Labour
Standard Rate (SR)	$12.00
Standard Hours (SH) (0.75 *92,000)	69,000
Actual Hours (AH)	79,400
Actual Rate (AR)	$13.00
Labour Rate Variance:
AH	X	SR	Minus	AH	X	AR
79,400	X	$12.00	Minus	79,400	X	13.00
		9,52,800	Minus			10,32,200	(79,400)	Unfavourable
Labour Efficiency Variance:
SH	X	SR	Minus	AH	X	SR
69,000	X	$12.00	Minus	79,400	X	$12.00
		8,28,000	Minus			9,52,800	(1,24,800)	Unfavourable
Total variance							(2,04,200)	Unfavourable