[mitchmatch]

The standard direct labor cost to produce one pound of output for a company is presented below. Related data regarding the planned and actual production activities for the current month for the company are also given below.

(Note: DLH = Direct Labor Hours)

Direct Labor Standard:

.40 DLH at $12.00 per DLH = $4.80

Planned production 15,000 pounds

Actual production 15,500 pounds

Actual direct labor costs (6,250 DLH) $75,250

The company’s direct labor efficiency variance for the current month would be:

A.

$600 unfavorable.

B.

$602 unfavorable.

Incorrect C.

$2,400 unfavorable.

D.

$3,000 unfavorable.

I dont understand why im not multiplying .4x 15000( which im assuming is the budgeted which will give me( actual hours- budget hours)x actual rate?

can someone please clear up my confusion

FAR-76 First attempt.
AUD-79 First attempt.
REG-79 First attempt.
BEC-79 First attempt.

Done!

BECKERS

[Biff-1955-Tannen]

So correct me if I'm wrong, but the answer should be A.

An efficiency variance will be calculated as Standard cost x (Actual DLH – DLH per actual output)

12.00 x (6250 – 6200*) = 600 Unfavorable

*Actual output was 15,500 units. We budgeted for .4 DLH per unit. So 15,500 units x .4 DLH = 6,200 budgeted hours

When I first saw this problem, I was really confused as to what the cost per DLH was also.
“.40 DLH at $12.00 per DLH = $4.80” <— this is one of the most confusing ways to say the cost per DLH. Idk why they didn't just say $12.00 per DLH. and .4 DLH per unit.

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[monikernc]

DL Efficiency = SR(Act Hours – Std Hours) Compute standard hours first: .4*15,500 = 6200

$12(6250-6200) = $12*50 = 600 and it is unfavorable because the actual hours exceeded the standard amount of 6200 hours for the production of 15,500 units.

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[mitchmatch]

Correct the right answer is A)

but im still confused, heres the explination

$600 unfavorable derives from the difference between the direct labor hours allowed for the output achieved (15,500 × .4 = 6,200) and the actual hours worked (6,250) times the standard direct labor rate ($12.00). Calculation: ((6,200 – 6,250) × $12).

i dont understand why we multiple the 15000x .4 as opposed to the 15500?

FAR-76 First attempt.
AUD-79 First attempt.
REG-79 First attempt.
BEC-79 First attempt.

Done!

BECKERS

[Biff-1955-Tannen]

“i dont understand why we multiple the 15000x .4 as opposed to the 15500?”
I'm not sure where you're seeing that we multiply 15,000 by .4. We did multiply 15,500 by .4 to get the budgeted input per actual output.

There are 3 components to this calculation: $12 (6,250 – 6,200)
$12 = the cost per direct labor hour (given in the problem)
6,250 = how many ACTUAL direct labor hours we used (given in the problem)
6,200= Direct labor hour per actual output. This means when we made our static budget, we budgeted .4 direct labor hours to make 1 unit of output. So if our actual output was 15,500 units (given in the problem), according to our static budget we SHOULD have only used 6,200 direct labor hours to make the 15,500 units that we actually produced. (15,500 x .4 = 6,200)

So this tells us that for the amount of actual output that we produced (15,500) we used 50 (6,250 – 6,200) direct labor hours too much. So if we went over by 50 DLH and it is $12 per DLH. This means we were inefficient (unfavorable) by $600 (50 x 12)

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[mitchmatch]

Sorry im all over the place do to internal panic. I dont understand why we multiply 15500 x .4 I thought we would multiply by the 15000 which is the budget i assume?

FAR-76 First attempt.
AUD-79 First attempt.
REG-79 First attempt.
BEC-79 First attempt.

Done!

BECKERS

[MaLoTu]

BIFF- how do we know to use the budgeted amount (.4) times the actual output (15500) when we are trying to get the standard rate? Isn't what happened in the solution actually more like a flexible budget?

I totally understand the math that was done, but like mitch, I am not sure that I would automatically know to use those numbers to derive the answer.

[Biff-1955-Tannen]

@MaLoTu yes part of the information that is given to us would be part of a flexible budget, but In order to find an efficiency variance, we are comparing actual results with the flexible budget.

I'm not sure exactly what you mean when you say “when we are trying to get the standard rate”
The standard rate is already given to us as $12 per DLH

I think taking the time to understand the components in the formula and why we are using them/how were are arriving at them, is equally as important as remembering the formula.

So if you have a question that asks for a price variance. What is it looking for? It wants to know of the total difference between your actual results and your flexible budget (your flexible budget variance), how much of that is due to price. (see below) So you know that you're going to have to take the difference between your budgeted price and your actual price times your actual output.
Actual units produced (actual price – budgeted price)

When you have an efficiency variance, you're trying to find how efficient or inefficient you were in making the product. How do you determine if you're efficient or not? By how much you're paying your workers? No. By how long it takes them to build a unit. So you know you're going to be taking the difference of how long it actually took them to build the 15,500 units, and how long it SHOULD have taken them to build 15,500 units. How do you know how long it should have taken them to build the 15,500 units? Well you budgeted them to take .4 hours to make one unit. So to make 15,500 units it should take them 15,500 x .4 hours right? So it should take them 6,200 hours to make 15,500 units.

The formatting on this forum sucks but i'll try anyway… (The numbers below are not from this problem just using as an example)
AQ = actual quantity. AP = actual price. BI/AQ = Budgeted input per actual quantity BP = budgeted price

Actual Results…………………………………………………………………Flexible Budget
AQ x AP…………………………..(AQ x BP)……………………………….BI/AQ x BP
(4,500hrs x 29)……………(4,500 hrs x $30)…………………(.4hr/unit x 10,000 units x 30/hr)
= $130,500………………………=$135,000……………………………….=$120,000
|____________________________________________________|
……………………………………………..^
…………………………………………$10,500
……………………………..Flexible Budget Variance
|__________________________|__________________________|
……………………^………………………………………………..^
………………….$4,500F………………………………..$15,000U
……………price variance…………………………..efficiency variance
…….AQ (AP-BP)……………………………………….BP(AQ-BI/AQ)

So in the above example. Of the $10,500 flexible budget variance, we can attribute $4,500 of that variance due to a favorable difference in the actual price and the budgeted price. And we can attribute $15,000 of it due to being inefficient with our labor

I hope I didn't confuse you more… -_-

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[MaLoTu]

Lol… The formatting didn't help! I am on my phone donut is half off the page! I do understand more. I will definitely try to remember that some variance questions may require the use of flexible budget numbers. After your explanation of the standard rate I see why my question didn't make sense ( the part about us calculating the standard rate). Thanks for the help… I am seriously impressed you still remember that much!

[Author]

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