Question

Erie Company manufactures a mobile fitness device called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate are as follows:
Standard Hours 24 minutes
Standard Rate per Hour $5.40
Standard Cost $2.16

During August, 8,530 hours of direct labor time were needed to make 19,800 units of the Jogging Mate. The direct labor cost totaled $44,356 for the month.

Required:

a. What is the standard labor-hours allowed (SH) to makes 19,800 Jogging Mates?
b. What is the standard labor cost allowed (SH x SR) to make 19,800 Jogging Mates?
c. What is the labor spending variance?
d. What is the labor rate variance and the labor efficiency variance?
e. The budgeted variable manufacturing overhead rate is $4.50 per direct labor-hour. During August, the company incurred $44,356 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month

Answer 1

a. Standard labor-hours is 7920 hours.

b. Standard labor cost allowed is $42,768.

c. The labor spending variance is $1588(U).

d.  The labor rate variance is $1706 and the labor efficiency variance $3294(U).

e.  The variable overhead rate is $5971(U) and efficiency variances for the month $5580(U).

Explanation:

a)Standars hours(SH) allowed to make 19800 jogging mates

=SH per unit $\times$ 19800

=(24/60)*19800

=7920 hours

24/60 has been taken to convert minutes into hours.  

b)Standard Labor Cost (SC) of 19800 jogging mates

$=19800 \times SC per unit=19800 \times 2.16\\= 42,768$

=$42,768

c)Labour Spending Variance

$=Standard Cost - Actual Cost(AC)= 42,768 - 44,356= 1588(U)$

=$1588(U)

d)Labor Rate Variance  

$=(SR per hour-AR per hour)\timesAH=(5.4-5.2)*8530= 1706(F)$

=$1706

Actual Hours(AH) * Actual Rate per hour(AR)= Actual Cost(AC)

$8530 \times AR = 44,356$

$AR = \frac{44356}{8530}\\ \\AR = 5.2$

Labor Efficiency Variance

$=(SH-AH) \times SR\\=(7920-8530)* 5.4= 3294(U)$

=$3294(U)

e) Variable overhead rate variance = Actual hours worked  (Standard overhead rate - Actual overhead rate)

= 8530  (4.5 - 5.20)

= $5971(U)

Actual overhead rate = $44,356 / 8530 = 5.20

Variable overhead efficiency variance = Standard overhead rate   (Standard hours - Actual hours)

= 4.50  (7290 - 8530)

= $5580(U).