Direct Labor and Variable Overhead Variances
Response to the following problem:
Erie Company manufactures a small mp3 player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for on Jogging Mate mp3 player are as follows:
Standard Hours Standard Rate per Hour Standard Cost
18 minutes $12.00 $3.60
During August, 5,750 hours of direct labor time were needed to make 20,000 units of the Jogging Mate. The direct labor cost totaled $73,600 for the month.
Required:
1. According to the standards, what direct labor costs should have been incurred to make 20,000 units of the Jogging Mate? By how much does this differ from the cost that was incurred?
2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance.
3. The budgeted variable manufacturing overhead rate is $4 per direct-labor hour. During August, the company incurred $21,850 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances per month.