Question

Erie Company manufactures a mobile fitness device called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate are as follows:

Standard Hours	Standard Rate per Hour	Standard Cost
24 minutes	$6.00	$2.40

During August, 8,470 hours of direct labor time were needed to make 19,900 units of the Jogging Mate. The direct labor cost totaled $49,973 for the month.

Required:

1. What is the standard labor-hours allowed (SH) to makes 19,900 Jogging Mates?

2. What is the standard labor cost allowed (SH × SR) to make 19,900 Jogging Mates?

3. What is the labor spending variance?

4. What is the labor rate variance and the labor efficiency variance?

5. The budgeted variable manufacturing overhead rate is $4.70 per direct labor-hour. During August, the company incurred $44,044 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.

(For requirements 3 through 5, indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Do not round intermediate calculations.)

	1. Standard labor-hours allowed 2. Standard labor cost allowed 3. Labor spending variance 4. Labor rate variance Labor efficiency variance 5. Variable overhead rate variance Variable overhead efficiency variance

Answer 1

• All working forms part of the answer
• Requirement 1

Standard labor Hours allowed (SH) to make 19,900 units = (Standard hours for 1 units x 19,900 units) = (24minutes/60minutes) x 19,900

= 0.4 hours x 19,900
= 7,960 Standard labor hours allowed

• Requirement 2

Standard labor cost allowed = Standard hours allowed for 19900 units x Standard rate per hour.

= 7960 standard hours x $ 6 per hour = $ 47,760

• Requirement 3

Labor Spending variance = Difference between Standard labor cost and Actual Labor cost.

= $ 47,760 – $ 49,973

= $ 2,213 Unfavourable, because actual cost is MORE than Standard cost.

• Requirement 4

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        6.00	-	$                       5.90	)	x	8470
	847
	Variance		847			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	7960	-	8470	)	x	$                           6.00
	-3060
	Variance		3060			Unfavourable-U

• Requirement 5

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        4.70	-	$                       5.20	)	x	8470
	-4235
	Variance		4235			Unfavourable-U
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	7960	-	8470	)	x	$                           4.70
	-2397
	Variance		2397			Unfavourable-U

• All requirements summarised:

1	Standard labor-hours allowed	7960	standard labor hours
2	Standard labor cost allowed	$      47,760.00
3	Labor spending variance	$        2,213.00	Unfavourable
4	Labor rate variance	$            847.00	Favourable
	Labor efficiency variance	$        3,060.00	Unfavourable
5	Variable overhead rate variance	$        4,235.00	Unfavourable
	Variable overhead efficiency variance	$        2,397.00	Unfavourable