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Chapter 23: Problem 10

The Freedom Clothes Company produced 18,000 units during June of the current year. The Cutting Department used 3,500 direct labor hours at an actual rate of \(12.10 per hour. The Sewing Department used 5,800 direct labor hours at an actual rate of \)11.80 per hour. Assume there were no work in process inventories in either department at the beginning or end of the month. The standard labor rate is $12.00. The standard labor time for the Cutting and Sewing departments is 0.20 hour and 0.30 hour per unit, respectively a. Determine the direct labor rate and time variance for the (1) Cutting Department and (2) Sewing Department. b. Interpret your results.

Short Answer

Expert verified
Cutting: Rate variance = $350 U, Time variance = $1,200 F. Sewing: Rate variance = $1,160 F, Time variance = $4,800 U. Cutting demonstrated cost overages and labor efficiency; Sewing showed cost savings but inefficiency.

Step by step solution

01

Calculate Total Standard Hours for Cutting Department

The standard time for the Cutting Department is 0.20 hours per unit. With 18,000 units produced, the total standard hours is: \ \[ \text{Standard Hours (Cutting)} = 18,000 \times 0.20 = 3,600 \text{ hours} \]
02

Calculate Total Standard Hours for Sewing Department

The standard time for the Sewing Department is 0.30 hours per unit. With 18,000 units produced, the total standard hours is: \ \[ \text{Standard Hours (Sewing)} = 18,000 \times 0.30 = 5,400 \text{ hours} \]
03

Calculate Direct Labor Rate Variance for Cutting Department

The direct labor rate variance is calculated by comparing the actual labor cost to the expected (standard) labor cost. For the Cutting Department: \ \[ \text{Rate Variance (Cutting)} = (\text{Actual Rate} - \text{Standard Rate}) \times \text{Actual Hours} \ = (12.10 - 12.00) \times 3,500 = 0.10 \times 3,500 = 350 \text{ (unfavorable)} \]
04

Calculate Direct Labor Rate Variance for Sewing Department

Similarly, for the Sewing Department: \ \[ \text{Rate Variance (Sewing)} = (\text{Actual Rate} - \text{Standard Rate}) \times \text{Actual Hours} \ = (11.80 - 12.00) \times 5,800 = -0.20 \times 5,800 = -1,160 \text{ (favorable)} \]
05

Calculate Direct Labor Time Variance for Cutting Department

The time variance measures the efficiency of labor usage. For the Cutting Department: \ \[ \text{Time Variance (Cutting)} = (\text{Actual Hours} - \text{Standard Hours}) \times \text{Standard Rate} \ = (3,500 - 3,600) \times 12.00 = -100 \times 12.00 = -1,200 \text{ (favorable)} \]
06

Calculate Direct Labor Time Variance for Sewing Department

For the Sewing Department, the calculation is: \ \[ \text{Time Variance (Sewing)} = (\text{Actual Hours} - \text{Standard Hours}) \times \text{Standard Rate} \ = (5,800 - 5,400) \times 12.00 = 400 \times 12.00 = 4,800 \text{ (unfavorable)} \]
07

Interpret Results

The Cutting Department had an unfavorable rate variance, indicating higher labor costs than expected, but a favorable time variance, showing efficiency in labor usage. The Sewing Department had a favorable rate variance, indicating lower labor costs, but an unfavorable time variance, suggesting inefficiency in labor usage.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Labor Rate Variance
Labor rate variance is a key concept in productivity and cost management. It helps identify whether the actual wages paid to workers differ from the standard hourly wages set by the organization. This variance is calculated to understand the financial impact of any deviation.
In the exercise, both the Cutting and Sewing Departments have different outcomes. For the Cutting Department, the actual hourly wage was $12.10 compared to the standard rate of $12.00, resulting in an unfavorable variance of $350. This means the department paid more in wages than expected. Conversely, the Sewing Department paid an actual rate of $11.80, resulting in a favorable variance of $1,160, meaning they spent less on labor costs than expected.
  • Unfavorable rate variance: actual wages > standard rate 鈫� extra cost
  • Favorable rate variance: actual wages < standard rate 鈫� cost saving
Understanding labor rate variance helps departments manage their labor costs effectively and encourages cost-saving measures where possible.
Labor Time Variance
Labor time variance is another critical component of variance analysis, focusing on the efficiency of labor utilization. It shows the difference between actual labor hours used and the expected standard hours.
In the case of the Cutting Department, the actual hours used were 3,500 compared to the standard hours of 3,600, leading to a favorable time variance of $1,200. This indicates efficient use of labor, as fewer hours were needed than planned. On the other hand, the Sewing Department used 5,800 hours compared to a standard of 5,400, resulting in an unfavorable time variance of $4,800.
  • Favorable time variance: actual < standard hours 鈫� efficiency
  • Unfavorable time variance: actual > standard hours 鈫� inefficiency
By analyzing labor time variance, companies can seek ways to improve workforce efficiency and productivity.
Standard Hours Calculation
Calculating standard hours involves determining the expected time needed to produce a certain number of units. This calculation sets benchmarks for labor efficiency and cost management.
In this exercise, the standard labor time for the Cutting Department is 0.20 hours per unit, and for the Sewing Department, it鈥檚 0.30 hours per unit. To find the total standard hours, you multiply the standard time per unit by the total units produced, which is 18,000 in this case.
  • Cutting Department: \[18,000 imes 0.20 = 3,600 \ ext{hours}\]
  • Sewing Department: \[18,000 imes 0.30 = 5,400 \ ext{hours}\]
Understanding how to calculate standard hours is essential for setting realistic goals and managing labor efficiency.
Manufacturing Efficiency Analysis
Manufacturing efficiency analysis involves examining how well a manufacturing process uses resources, particularly labor. It combines rate and time variances to assess overall productivity.
In this exercise, the Cutting Department displayed both favorable time and an unfavorable rate variance. This means that while they had efficient labor usage, they incurred higher costs for the hours worked. The reverse was true for the Sewing Department, which had unfavorable time but favorable rate variance, indicating inefficiency in time usage but lower wage costs.
By balancing these variances, companies can aim to reduce unnecessary labor costs while maximizing productivity. Efficiency analysis is an ongoing process that helps highlight areas for improvement and strategies for cost optimization.

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Most popular questions from this chapter

The following data were taken from the records of Parrott Company for December 2010: \(\begin{array}{lr}\text { Administrative expenses } & \$ 72,000 \\ \text { Cost of goods sold (at standard) } & 345,000 \\ \text { Direct materials price variance - favorable } & 900 \\ \text { Direct materials quantity variance-favorable } & 1,200 \\ \text { Direct labor rate variance- unfavorable } & 500 \\ \text { Direct labor time variance-favorable } & 450 \\\ \text { Variable factory overhead controllable variance-favorable } & 250 \\\ \text { Fixed factory overhead volume variance-unfavorable } & 3,200 \\\ \text { Interest expense } & 2,250 \\ \text { Sales } & 580,000 \\ \text { Selling expenses } & 85,800\end{array}\) Prepare an income statement for presentation to management.

Scientific Molded Products Inc. prepared the following factory overhead cost budget for the Trim Department for August 2010 , during which it expected to use 10,000 hours for production: Scientific Molded Products has available 15,000 hours of monthly productive capacity in the Trim Department under normal business conditions. During August, the Trim Department actually used 11,000 hours for production. The actual fixed costs were as budgeted. The actual variable overhead for August was as follows: \begin{tabular}{lr} Actual variable factory overhead cost: & \\ Indirect factory labor & \(\$ 27,000\) \\ Power and light & 4,000 \\ Indirect materials & 13,500 \\ \hline Total variable cost & \(\$ 44,500\) \\ \hline \end{tabular} Construct a factory overhead cost variance report for the Trim Department for August.

One of the operations in the U.S. Post Office is a mechanical mail sorting operation. In this operation, letter mail is sorted at a rate of one letter per second. The letter is mechanically sorted from a three-digit code input by an operator sitting at a keyboard. The manager of the mechanical sorting operation wishes to determine the number of temporary employees to hire for December. The manager estimates that there will be an additional \(34,560,000\) pieces of mail in December, due to the upcoming holiday season. Assume that the sorting operators are temporary employees. The union contract requires that temporary employees be hired for one month at a time. Each temporary employee is hired to work 150 hours in the month. a. How many temporary employees should the manager hire for December? b. If each employee earns a standard \(\$ 18\) per hour, what would be the labor time variance if the actual number of letters sorted in December was \(33,840,000\) ?

St. Luke Hospital began using standards to evaluate its Admissions Department. The standard was broken into two types of admissions as follows: \begin{tabular}{lc} Type of Admission & Standard Time to Complete Admission Record \\ \cline { 2 - 3 } Unscheduled admission & 40 min. \\ Scheduled admission & \(10 \mathrm{~min} .\) \end{tabular} The unscheduled admission took longer, since name, address, and insurance information needed to be determined at the time of admission. Information was collected on scheduled admissions prior to the admissions, which was less time consuming. The Admissions Department employs two full-time people (40 productive hours per week, with no overtime) at \(\$ 18\) per hour. For the most recent week, the department handled 66 unscheduled and 240 scheduled admissions. a. How much was actually spent on labor for the week? b. What are the standard hours for the actual volume for the week? c. Calculate a time variance, and report how well the department performed for the week.

Western Wood Products Company prepared the following factory overhead cost budget for the Press Department for February 2010, during which it expected to require 10,000 hours of productive capacity in the department: \begin{tabular}{lrr} Variable overhead cost: & & \\ Indirect factory labor & \(\$ 27,500\) & \\ Power and light & 2,600 & \\ Indirect materials & & \\ Total variable cost & \(\$ 54,100\) \\ Fixed overhead cost: & \(\$ 42,000\) & \\ Supervisory salaries & 40,000 & \\ Depreciation of plant and equipment & 12,000 & \\ Insurance and property taxes & & \\ Total fixed cost & & 94,000 \\ \hline Total factory overhead cost & \(\$ 148,100\) \\ \hline \end{tabular} Assuming that the estimated costs for March are the same as for February, prepare a flexible factory overhead cost budget for the Press Department for March for 8,000 , 10,000 , and 12,000 hours of production.
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