Question

Piechocki Corporation manufactures and sells a single product. The company uses units as the measure of activity in its budgets and performance reports. During May, the company budgeted for 7,400 units, but its actual level of activity was 7,350 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for May:

Data used in budgeting:

	Fixed element per month			Variable element per unit
Revenue		-		$	34.90
Direct labor	$	0		$	5.50
Direct materials		0			13.40
Manufacturing overhead		31,000			2.40
Selling and administrative expenses		26,200			0.20
Total expenses	$	57,200		$	21.50

Actual results for May:

Revenue	$	257,800
Direct labor	$	39,870
Direct materials	$	99,890
Manufacturing overhead	$	47,000
Selling and administrative expenses	$	30,540

The activity variance for direct labor in May would be closest to:

Answer 1

• Activity Variance for Direct Labor = Direct Labor cost for Budgeted 7400 units – Direct Labor cost for Actual 7350 units at Budgeted Cost.
• Budgeted Direct Labor Cost for Budgeted 7400 units = 7400 units x $ 5.50 = $ 40,700
• Budgeted Direct Labor Cost for Actual 7350 units = 7350 units x $ 5.50 = $ 40,425
• Since budgeted labor cost for actual is LESS than budgeted labor cost for budgeted units, the variance is FAVOURABLE.
• Activity Variance for direct labor cost = $ 40,700 – $ 40,425

= $ 275 Favourable = Answer