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
18 minutes	$12.00	$3.60

During August, 5,750 hours of direct labor time were needed to make 20,000 units of the Jogging Mate. The direct labor cost totaled $73,600 for the month.

1. According to the standards, what direct labor cost should have been incurred to make 20,000 units of the Jogging Mate? By how much does this differ from the cost that was incurred? (Round Standard labor time per unit and Standard direct labor rate to 2 decimal places.)

Number of units manufactured
Standard labor time per unit
Total standard hours of labor time allowed
Standard direct labor rate per hour
Total standard direct labor cost
Actual direct labor cost
Standard direct labor cost
Total variance

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.)

Labor rate variance
Labor efficiency variance

3. The budgeted variable manufacturing overhead rate is $4 per direct labor-hour. During August, the company incurred $21,850 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month. (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.)

Variable overhead rate variance
Variable overhead efficiency variance

Answer 1

1.

Number of units manufactured	20,000
Standard labor time per unit	18 minutes
Total standard hours of labor time allowed	6,000
Standard direct labor rate per hour	$12.00
Total standard direct labor cost	$72,000
Actual direct labor cost	$73,600
Standard direct labor cost	$72,000
Total variance	$1,600 U

2. Labor rate variance = (Standard rate - actual rate) x Actual hours used

= {$12 - ($73,600 / 5,750)} x 5,750 = $4,600 Unfavorable

Labor efficiency variance = (Standard hours - actual hours) x Standard rate
= {6000 - 5,750} x $12 = $3,000 Favorable

3. Variable overhead rate variance = (Standard rate - actual rate) x Actual hours used
= {$4 - ($21,850 / 5,750) x 5,750 = $1,150 Favorable

Variable overhead efficiency variance = (Standard hours - actual hours) x Standard rate
= {6,000 - 5,750} x $4 = $1,000 Favorable