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.

Required:
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 to 2 decimal places.)

      

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).)

      

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).)

      

Answer 1

1) Schedule

No of units manufactured	20000
Standard labor hour per unit (18/60)	0.30
Standard labor hour allowed	6000
Standard labor cost per hour	12
Total Standard labor cost	72000
Actual labor cost	73600
Total labor variance	1600 U

2) Labor rate variance = (12*5750-73600) = 4600 U

Labor efficiency variance = (6000-5750)*12 = 3000 F

3) Variable overhead rate variance = (4*5750-21850) = 1150 F

Variable overhead efficiency variance = (6000-5750)*4 = 1000 F