Question

Hand Company manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.50 per hour. They have calculated that the labor spending variance is $5,700, but they need help determining if it is favorable or unfavorable, and they need help determining how much of this is due to labor rate vs. labor efficiency.

Answer 1

Hand Company

The labor spending variance of $5,700 is unfavorable.

$2,100 is due to labor rate.

$3,600 is due to labor efficiency.

Step-by-step explanation:

a) Data and Calculations:

Standard direct labor cost per hour = $18.00

Actual direct labor cost per hour = $18.50

Direct labor rate variance = $0.50 ($18.00 - $18.50) Unfavorable

Total labor rate variance = $2,100 or (4,200 * $0.50)

Actual units produced during July = 2,000

Standard direct labor efficiency rate = 2 hours

Total direct labor hours (at standard rate) = 2,000 * 2 = 4,000 hours

Actual direct labor hours used = 4,200 hours

Direct labor efficiency variance in hours = 200 (4,000 - 4,200) hours Unfavorable

Actual direct labor efficiency rate = 2.1 hours (4,200/2,000)

Direct labor efficiency variance = $3,600 ($5,700 - $2,100)