Question

Erie Company manufactures a small mp3 player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate mp3 player are as follows: Standard Hours Standard Rate per Hour Standard Cost 24 minutes $6.40 $2.56 During August, 8,390 hours of direct labor time were needed to make 19,100 units of the Jogging Mate. The direct labor cost totaled $52,857 for the month. Required: 1. According to the standards, what direct labor cost should have been incurred to make 19,100 units of the Jogging Mate? By how much does this differ from the cost that was incurred? (Round Standard labor time per unit to 2 decimal places.) 2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculations.)

Answer 1

Answer 1:

Standard cost = Standard rate * standard hours

= 6.40 * 7,640

= $ 48,896

Total variance = Standard cost (-) Actual cost

= 48,896 (-) 52,857

= $ 3,961 (Unfavorable)

Answer 2:

It is given that:

Standard Rate	$ 6.40
Standard hours (19100*24/60)	7,640
Actual rate (52857/8390)	$ 6.30
Actual hours	8,390

Now,

Labor Rate Variance =	(Standard Rate - Actual Rate) * Actual hours
Labor Rate Variance =	( $ 6.4 - $ 6.3) * 8390
Labor Rate Variance =	$ 839 Favorable

and,

Labor Efficiency Variance =	(Standard hours - Actual hours) * Standard rate
Labor Efficiency Variance =	(7640 - 8390) * $ 6.4
Labor Efficiency Variance =	$ (4,800) Unfavorable

In case of any doubt, please feel free to comment.