Question

Lee Company's standards for the most recent period are given below. Fixed and variable manufacturing overhead costs are applied to products on the basis of machine hours. The denominator volume of machine hours is 9,000.

	Standard Quantity or Hours per unit	Standard Price or Rate per unit	Standard Cost per unit
Direct Materials	3 feet	$6 per foot	$18
Direct Labor	1.5 direct labor hours	$10 per direct labor hour	$15
Variable Overhead	2 machine hours	$12 per machine hour	$24
Fixed Overhead	2 machine hours	$15 per machine hour	$30

Actual costs for the most recent period, during which 5,000 units of output were actually produced and used 9,600 machine hours, are given below:

Direct Materials	The firm purchased 16,000 feet at $6.30 per foot, but only used 14,500 feet in production.
Direct Labor	The firm used 7,150 direct labor hours and paid $11 per direct labor hour.
Variable Overhead	Actual variable overhead costs were $122,880.
Fixed Overhead	Actual fixed overhead costs were $142,000.

What was the company’s labor efficiency variance?

	A.	$3,850 unfavorable
	B.	$3,500 unfavorable
	C.	$3,500 favorable
	D.	$3,850 favorable

Answer 1

Labor Efficiency Variance

Actual Hours (AH) = 7,150 hours

Standard Hours (SH) = 7,500 hours [5,000 units x 1.50 hours per unit]

Standard Rate (SR) = $10.00 per hour

Therefore, the Direct Labor Efficiency Variance = Standard Rate x [Actual Hours – Standard Hours]

= SR x [AH – SH]

= $10.00 per hour x [7,150 hours – 7,500 hours]

= -$3,500

= $3,500 F [Favourable]

Here, the direct labor efficiency variance is Negative $3,500.

“Therefore, the company’s labor efficiency variance is (c). $3,500 Favorable”