Erie Company manufactures a mobile fitness device called the

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:

During August, 10,390 hours of direct labor time were needed to make 19,500 units of the Jogging Mate. The direct labor cost totaled $55,067 for the month.

Required:

1. What is the standard labor-hours allowed (SH) to makes 19,500 Jogging Mates?

2. What is the standard labor cost allowed (SH × SR) to make 19,500 Jogging Mates?

3. What is the labor spending variance?

4. What is the labor rate variance and the labor efficiency variance?

5. The budgeted variable manufacturing overhead rate is $4.30 per direct labor-hour. During August, the company incurred $51,950 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.

Solution

Answer 1.

Standard labor-hours allowed = Number of units * Standard hours per unit
Standard labor-hours allowed = 19,500 * 0.50
Standard labor-hours allowed = 9,750

Answer 2.

Standard labor cost allowed = Standard labor-hours allowed * Standard rate per hour
Standard labor cost allowed = 9,750 * $5.40
Standard labor cost allowed = $52,650

Answer 3.

Labor Spending Variance = Actual labor cost - Standard labor cost allowed
Labor Spending Variance = $55,067 - $52,650
Labor Spending Variance = $2,417 Unfavorable

Answer 4.

Labor Efficiency Variance = Actual hours incurred * Standard rate per hour - Standard labor cost allowed
Labor Efficiency Variance = 10,390 * $5.40 - $52,650
Labor Efficiency Variance = $3,456 Unfavorable

Labor Rate Variance = Actual Labor cost - Actual hours incurred * Standard rate per hour
Labor Rate Variance = $55,067 - 10,390 * $5.40
Labor Rate Variance = $1,039 Favorable

Answer 5.

Variable Overhead Spending Variance = Actual Variable Overhead Cost - Actual hours incurred * Standard Variable Overhead rate per hour
Variable Overhead Spending Variance = $51,950 - 10,390 * $4.30
Variable Overhead Spending Variance = $7,273 Unfavorable

Variable Overhead Efficiency Variance = Standard Variable Overhead rate per hour * (Actual hours incurred - Standard labor-hours allowed)
Variable Overhead Efficiency Variance = $4.30 * (10,390 - 9,750)
Variable Overhead Efficiency Variance = $2,752 Unfavorable