Question

Jake’s Cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 0.50 direct labor hours to produce one unit (batch) of product at a cost of $10 per hour. Actual results are in for last year, which indicates 45,000 batches of cheese were sold. The company's direct labor workforce worked 27,500 hours at $9 per hour.

Required:

(1) Calculate the labor rate variance.

(2) Calculate the labor efficiency variance.

(3) Suggest several possible reasons for the labor rate and efficiency variances.

Answer 1

Answer 1.

Actual hours worked = 27,500
Actual Rate = $9 per hour
Standard Rate = $10 per hour

Labor Rate Variance = Actual hours * (Actual Rate - Standard Rate)
Labor Rate Variance = 27,500 * ($9 - $10)
Labor Rate Variance = $27,500 Favorable

Answer 2.

Standard Rate = $10 per hour
Actual hours = 27,500

Standard hours = 0.50 hours per batch * 45,000 batches
Standard hours = 22,500

Labor Efficiency Variance = Standard Rate * (Actual hours - Standard hours)
Labor Efficiency Variance = $10 * (27,500 - 22,500)
Labor Efficiency Variance = $50,000 Unfavorable

Answer 3.

Skill level of labor
Poor wages rate demotivate labor
Bad scheduling of resources
Idle time