Question

Problem 15.21 LO 4, 5

Direct labor variances - insurance company application The Foster Insurance Company developed standard times for processing claims. When a claim was received at the processing center, it was first reviewed and classified as simple or complex. The standard time for processing was:

Simple claim......................................................36 minutes

Complex claim...................................................1.25 hours

Employees were expected to be productive 7.5 hours per day. Compensation costs were $135 per day per employee. During July, which had 20 working days, the following number of claims were processed:

Simple claims....................................................3,000 processed

Complex claims..................................................960 processed

Required:

a. Calculate the number of workers that should have been available to process July claims.

b. Assume that 23 workers were actually available throughout the month of July. Calculate a labor efficiency variance expressed as both a number of workers and a dollar amount for the month.

Answer 1

Answers:

a.)

Standard time for processing simple claim = 36 minutes

Standard time for processing complex claim= 1.25 hours

Expected work hours a day = 7.5 hours

Compensation cost per employee = $135 per day

Total days of work = 20

Number of process July simple claims = 3000

Number of July complex claims =960

Standard number of workers essential for the month 12 simple and 8 complex so that would give a total of 20 essential workers that are supposed to have been available to process the July claims.

.

b.)

Labor efficiency variance for July in terms of the number of workers is Calculated as follows:

= ( Actual - standard)

= 23 - 20 = 3Unfavorable

Labor efficiency variance for July in dollars = Number of workers × number of days × Pay per day

= 3 Employees × 20 Days × $135

= $8,100 Unfavaorable