Question

The budget for the month of May was for 9,600 units at a direct materials cost of $21 per unit. Direct labor was budgeted at 30 minutes per unit for a total of $115,200. Actual output for the month was 9,100 units with $133,500 in direct materials and $111,285 in direct labor expense. The direct labor standard of 30 minutes was obtained throughout the month. Variance analysis of the performance for the month of May would show a(n):____________
a) unfavorable direct labor price (rate) variance of $2,085.
b) favorable materials efficiency (quantity) variance of $10,500.
c) unfavorable direct labor efficiency variance of $2,085.
d) favorable direct labor efficiency variance of $2,085.

Answer 1

Answer: a) unfavorable direct labor price (rate) variance of $2,085.

Explanation:

The purpose of calculating variance is to see if a company is being efficient in it's production of goods and services or in it's general affairs. The variance is calculated by subtracting the actual amount that was used to do something from it's budgeted amount.

If the actual amount is higher then the Variance is said to be Unfavourable. The reverse holds true.

Calculating the Direct Labor price (rate) Variance will give us,

Direct Labor Price (rate) Variance = (Actual Price - Standard price)*Actual Hour

NB - Figures are given for 30 minutes so need to be converted.

Direct Labor Price (rate) Variance = (111,285/9,100 *2 - 115,200/9,600 * 2 ) * 9100/2

= $2,085

Actual Price (rate) variance was higher than Standard Price (rate) variance which led to an Unfavourable balance of $2,085