Direct Manufacturing Labor and Variable Manufacturing Overhead Variances.
Response to the following problem:
Sarah Beth's Art Supply Company produces various types of paints. Actual direct manufacturing labor hours in the factory that produces paint have been higher than budgeted hours for the last few months and the owner, Sarah B. Jones, is concerned about the effect this has had on the company's cost overruns. Because variable manufacturing overhead is allocated to units produced using direct manufacturing labor hours, Sarah feels that the mismanagement of labor will have a twofold effect on company profitability. Following are the relevant budgeted and actual results for the second quarter of 2008.
Budget Information Actual Results
Paint sot production 10,000 13,000
Direct manuf. labor hours per paint set 0.5 hour 0.75 hour
Direct manufacturing labor rate $20/hour $20.20/hour
Variable manufacturing overhead rate $10/hour $ 9.75/hour
1. Calculate the direct manufacturing labor price and efficiency variances and indicate whether each is favorable (F or unfavorable (U).
2. Calculate the variable manufacturing overhead spending and efficiency variances and indicate whether each is favorable (F) or unfavorable (U).
3. For both direct manufacturing labor and variable manufacturing overhead, do the price/spending variances help Sarah explain the efficiency variances?
4. Is Sarah correct in her assertion that the mismanagement of labor has a twofold effect on cost over- runs? Why might the variable manufacturing overhead efficiency variance not be an accurate representation of the effect of labor overruns on variable manufacturing overheadcosts?