The Metal Machining Company specialises in manufacturing bra

The Metal Machining Company specialises in manufacturing brake wheel cylinders for motor cars. It buys castings which are then turned, bored and polished. A standard cost system is employed. The standard prime cost data per wheel cylinder are as follows:

                        Casting                                                 $8.00

                        Direct labour - ½ hr @ $12 per hr              6.00

                        Standard prime cost                              $14.00

For the Turning Department the standard machine time for one cylinder is 5 minutes. Overhead in this department is allocated using standard machine hours as the cost driver. Budgeted overhead for the year consisted of $80 000 fixed costs and $120 000 variable costs.

Budgeted output for the year was 120 000 cylinders. Actual output was 100 800 units. Other results for the year were:

            Castings purchased and used - 101 000 @ $7.60             $767 600

            Direct labour - 55 000 hours @ $12.40 per hour             682 000

            Fixed overhead - Turning Department                                84 000

            Variable overhead - Turning Department                       116 000

            Machine hours - Turning Department                                  9 500

Find labor efficiency variable.

Solution

Labor efficiency variance = Standard rate x (Actual hours – Standard hours)

Standard hours = Actual output x Standard hours per unit of output = 100800 units x ½ hour = 50400 hours

Labor efficiency variance = $12 x (55000 – 50400) = $12 x 4600 = $55200 Unfavorable