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Chapter 7: Problem 20

Basix Inc. calculates direct manufacturing labor variances and has the following information: Actual hours worked: 200 Standard hours: 250 Actual rate per hour: \(\$ 12\) Standard rate per hour: \(\$ 10\) Given the information above, which of the following is correct regarding direct manufacturing labor variances? a. The price and efficiency variances are favorable. b. The price and efficiency variances are unfavorable. c. The price variance is favorable, while the efficiency variance is unfavorable. d. The price variance is unfavorable, while the efficiency variance is favorable.

Short Answer

Expert verified
The correct answer is (b), as both price and efficiency variances are unfavorable. The price variance is \$400 and the efficiency variance is -\$500.

Step by step solution

01

Calculate the Actual Labor Cost

To calculate the actual labor cost, multiply the actual hours worked by the actual rate per hour: Actual Labor Cost = Actual hours worked 脳 Actual rate per hour = 200 hours 脳 \$12/hour
02

Calculate the Standard Labor Cost

To calculate the standard labor cost, multiply the standard hours by the standard rate per hour: Standard Labor Cost = Standard hours 脳 Standard rate per hour = 250 hours 脳 \$10/hour
03

Calculate the Price Variance

The price variance is the difference between the actual labor cost and the standard labor cost at the actual hours worked: Price Variance = (Actual Labor Cost - Standard Labor Cost at actual hours) = (Actual Labor Cost - (Actual hours 脳 Standard rate per hour)) = (200 hours 脳 \$12/hour - (200 hours 脳 \$10/hour))
04

Calculate the Efficiency Variance

The efficiency variance is the difference between the standard labor cost based on actual hours and the standard labor cost: Efficiency Variance = (Standard Labor Cost at actual hours - Standard Labor Cost) = ((Actual hours 脳 Standard rate per hour) - Standard Labor Cost) = ((200 hours 脳 \$10/hour) - (250 hours 脳 \$10/hour))
05

Identify the correct option

Now that we have calculated the price and efficiency variances, we can compare whether they are favorable or unfavorable and determine the correct option. A variance is considered favorable if it is positive, meaning the actual labor cost is less than the standard labor cost. A variance is considered unfavorable if it is negative, meaning the actual labor cost is greater than the standard labor cost. Price Variance = (200 hours 脳 \$12/hour - (200 hours 脳 \$10/hour)) = \$400 (Unfavorable, since it's positive) Efficiency Variance = ((200 hours 脳 \$10/hour) - (250 hours 脳 \$10/hour)) = -\$500 (Unfavorable, since it's negative) Based on our calculations, both price and efficiency variances are unfavorable. Thus, the correct answer is: b. The price and efficiency variances are unfavorable.

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Key Concepts

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

Price Variance
Price variance in labor cost analysis is about comparing what you "actually" pay for labor against what you "should have" paid according to your budget or standards.
Imagine it like a shopping scenario where you predict your grocery bill to be $50 but end up spending $70. The difference of $20 is akin to the price variance but in a labor context.
Let's walk through the calculation.
  • First, determine the actual cost for the labor based on actual work done, which is 200 hours at the rate of $12 per hour. Here it comes out to be $2,400.
  • Next, calculate what you would have paid if the standard rate was used for these actual hours, which would be 200 hours at $10 per hour, totaling $2,000.
The price variance is therefore the difference between these two figures: $2,400 - $2,000 = $400.
Since the actual cost is higher, your price variance is unfavorable by $400.
This means you paid more per hour than you planned.
Efficiency Variance
Efficiency variance pivots around the idea of how many hours it should take to do a job versus how many hours it actually took.
Think of it as a race where the expected finish time is much longer than your actual time. This exposes either higher-than-expected speed or efficiency errors.
For the calculation:
  • The standard cost for the work based on standard hours is 250 hours multiplied by the standard rate of $10 per hour, which equals $2,500.
  • The comparison is made with actual hours but keeping the standard rate, which, in this case, would be 200 hours at $10 per hour equating to $2,000.
The efficiency variance results in a difference of $2,000 - $2,500 = -$500, which is shown as unfavorable.
Here it reflects 50 hours less done compared to what was planned, indicating inefficiency. An unfavorable efficiency variance means things didn鈥檛 go as fast as expected using the set benchmarks.
Standard and Actual Labor Cost Analysis
To deeply understand labor variances, we need clarity on standard and actual labor cost analysis.
Standard labor cost is an estimate made before the work begins. It's based on assumed rates and hours that seem ideal for a task's completion.
  • It helps businesses target how much they plan to spend on labor.
  • Calculated as the multiplication of standard hours by the standard rate per hour.
Actual labor cost, on the other hand, deals with what truly happens after the task is completed. It takes the real hours worked, multiplied by the real or actual pay rate.
In our example,
  • The actual cost matched up to 200 hours at $12 per hour, making it $2,400.
  • While the standard cost anticipated 250 hours at $10 per hour, which summed up to $2,500.
This comparison allows businesses to identify gaps in budgeting versus reality, giving them insight into potential cost control issues.

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Most popular questions from this chapter

List three causes of a favorable direct materials price variance.

Emerald Statuary manufactures bust statues of famous historical figures. All statues are the same size. Each unit requires the same amount of resources. The following information is from the static budget for 2017 : Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing labor: During 2017 , actual number of units produced and sold was 4,800 , at an average selling price of \(\$ 720 .\) Actual cost of direct materials used was \(\$ 392,700,\) based on 66,000 pounds purchased at \(\$ 5.95\) per pound. Direct manufacturing labor-hours actually used were 18,300 , at the rate of \(\$ 48\) per hour. As a result, actual direct manufacturing labor costs were \(\$ 878,400\). Actual fixed costs were \(\$ 1,170,000\). There were no beginning or ending inventories. 1\. Calculate the sales-volume variance and flexible-budget variance for operating income. 2\. Compute price and efficiency variances for direct materials and direct manufacturing labor.

All of the following statements regarding standards are accurate except: a. Standards allow management to budget at a per-unit level. b. Ideal standards account for a minimal amount of normal spoilage. c. Participative standards usually take longer to implement than authoritative standards. d. Currently attainable standards take into account the level of training available to employees.

How might a manager gain insight into the causes of a flexible-budget variance for direct materials?

Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?
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