Question

Marvel Parts, Inc., makes seat covers for small cars. The company uses a standard cost system to help control its costs.   According to the standards that have been set for the seat covers, the factory should work 2,400 direct labor hours each month to produce 1,600 seat covers. The standard costs associated with this level of production are :

	Total	Per Set of Covers
Direct materials	$42,080	$26.30
Direct labor	$43,200	$ 27.00

During April, the factory worked 3,050 direct labor hours and produced 1,750 seat covers. The actual direct labor costs incurred for April were $53,550.

Required:

1. What is the standard quantity of total labor hours Marvel should use at the 1,750 seat cover level?
2. What is the standard rate for each hour of direct labor?
3. What is the total impact on profit due to the actual rate paid for direct labor per hour being different than the rate that was used in the budget? If it decreases profit, please put a negative (-) sign in front of your answer.

Answer 1

Standard quantity of labor hours required to produce one seat cover

= 2,400 / 1,600

= 1.5 direct labor hours per seat cover

Therefore, standard quantity of total labor hours Marvel should use at the 1,750 seat cover level

= 1,750 * 1.5

= 2,625 direct labor hours

Standard rate for each hour of direct labor

= 43,200 / 2,400

= $18 per direct labor hour

Actual rate for each hour of direct labour

= 53,550 / 3,050

= $17.56 per direct labor hour

Total impact on profit due to the actual rate paid for direct labor per hour being different than the standard rate

= (Standard rate - Actual rate) * Actual direct labor hours

= (18 - 17.56) * 3,050

= $1,350

Favorable impact on profit because actual rate per direct labor hour being less than the standard rate per direct labor hour.