Question

ou have started working as a cost accountant for a firm that has only been in business for one month. The firm is able to buy a new type of biodegradable plastic at a fixed price of $100 per roll. The plastic is then cut and sealed to make garbage bags. Fixed factory overhead is estimated to be $125,000 per month. During this past month, 8,000 cartons of garbage bags were produced, which represents 80% of the activity volume. You are given the following information:

Rolls of plastic used			40
Variable overhead incurred			$61,000
Overhead efficiency variance			$5,000	U
Standard costs per carton of garbage bags:
	Labour hours		2
	Wage rate		$8	per hour
	Total overhead		$20
	Rolls of plastic		0.004	rolls

Calculate the following:

Labour efficiency variance $_______________ (also favourable, unfavourable or neither)

Answer 1

Calculation of labour efficiency variance:

                             (SH-AH)*SR or (SH*SR) - (AH*SR)

SH= Standard hours allowed for actual output

AH= Actual hours worked

SR= Standard rate.

Standard direct labour hours allowed for units produced are 8, 000 produced at 2 hours = 16,000hours

= [$20*16000HRS]-[($8*2)*16000 HRS]

= [$20*16000HRS]-[16*16000 HRS]

= $3, 20, 00 - $2, 56,000

= $64000 (unfavourable)