Question

Derek Wilson operates Clean Ride Enterprises, an auto detailing company with 20 employees. Jamal Jackson has recently been hired by Wilson as a controller. Clean Ride's previous accountant had done very little in the area of variance analysis, but Jackson believes that the company could benefit from a greater understanding of his business processes. Because of the labor-intensive nature of the business, he decides to focus on calculating labor variances. Jackson examines past accounting records, and establishes some standards for the price and quantity of labor. While Clean Ride's employees earn a range of hourly wages, they fall into two general categories: skilled labor, with an average wage of $20 per hour, and unskilled labor, with an average wage of $10 per hour. One standard 5-hour detailing job typically requires a combination of 3 skilled hours and 2 unskilled hours. Actual data from last month, when 600 detailing jobs were completed, are as follows: Skilled (2,006 hours) $ 39,117 Unskilled (944 hours) $ 9,292 Total actual direct labor cost $ 48,409 Looking over last month's data, Jackson determines that Clean Ride's labor rate variance was $1,151 favorable, but the labor efficiency variance was $1.560 unfavorable. When Jackson presents his findings to Wilson, the latter is furious. "Do you mean to tell me that my employees wasted $1,560 worth of time last month? I've had enough. They had better shape up, or else!" Jackson tries to calm him down, saying that in this case the efficiency variance doesn't necessarily mean that employees were wasting time. Jackson tells him that he is going to perform a more detailed analysis, and will get back to him with more information soon. Required: 1. What is the budgeted cost of direct labor for 600 detailing jobs? (2 points) 2. How were the $1,151 favorable rate variance and the $1,560 unfavorable labor efficiency variance calculated? What was the company's flexible-budget variance in terms of direct labor? (5 points) 3. What do you think Jackson meant when said that "in this case the efficiency variance doesn't necessarily mean that employees were wasting time"? (3 points) 4. For the 600 detailing jobs performed last month, what is the actual direct labor input mix percentage? What was the standard mix for labor? (2 points) 5. Calculate the total direct labor mix and yield variances. (4 points) 6. How could these variances be interpreted? Did the employees waste time? Upon further investigation, you discover that there were some unfilled vacancies last month in the unskilled labor positions that have recently been filled. How will this new information likely impact the variances going forward? (4 points)

Answer 1

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Ans: Amount in $ 1. Calculation of budgeted cost of direct labor for 600 detailing jobs: Particuars Skilled ($20 x 3 hours) Unskilled ($10 x 2 hours) Cost per job Number of jobs Total budgeted cost (cost per job X No. of job) | $ Amount in $ 60.00 20.00 80.00 600.00 48,000.00 S 2. Calculation of $1,151 favourable rate variance, $1,560 unfavourable labor efficiency variance and flexible budget variance in terms of labor: Labor type Actual cost Actual quantity X Actual price $39,117 $9,292 $48,409 Budgeted cost Actual quantity X Budgeted price (2,006 $20) = $40,120 (944 x $10) = $9,440 $49,560 Flexible budget cost Budgeted quantity X Budgeted price (1,800 x $20) = $36,000 (1,200 x $10) = $12,000 $48,000 Skilled Unskilled $1,151 Fabourable Total price variance $1,560 Unfavourable Total efficiency variance $409 Unfavourable Total flexible budget variance

3 In a company where some workers are paid at a higher wages and others are at lower, an unfavorable efficiency variance can be occurred. when higher paid workers worked more than their standard time, an unfavorable efficiency variance will result. 3 4 Calculation of actual direct labor input mix and standard mix for labor: Labor type Actual mix Budgeted Mix Actual quantity of Input 2,006 hours 944 hours 2,950 hours 68% Skilled Unskilled Budgeted quantity of input for Actual output (3 hrs x 600unit) = 1,800 hrs (2 hrs x 600unit) = 1,200 hrs 3,000 hours 60% 32% 100% 40% 100% Total 3 5 Calculation of total direct labor mix and yield variances: Labor type Actual total input used X Actual input mix X Budgeted price (2,950X.68X20) = $40,120 (2,950X.32X10) = $9,440 $49,560 Actual total input used X Budgeted total input Budgeted input mix X allowed X Budgeted input Budgeted price mix X Budgeted price (2,950X 60X20) = $35,400 (3,000X.60X20) = $36,000 (2,950X.40X10) = $11,800 (3,000X.40X10) = $12,000 $47,200 $48,000 Skilled Unskilled $2,360 Unfabourable Total mix variance $800 Favourable Total yield variance $1,560 Unfavourable Total efficiency variance

6 When the efficiency variance was unfavorable, it was for the mix of labor not for the total hours used. The unfavorable mix variance is a result of a higher than standard percentage of skilled labor (68% vs. 60%) used. The yield variance, which is a more correct measure of hours worked, is favorable because total hours (2,950) were actually lower than the standard for 600 detail jobs (3,000). The skilled labor workers has probably be able to work more quickly than the unskilled. In the above information regarding the vacancies in the unskilled positions, last month could be treated as an outlier (especially in terms of the mix of labor employed), and more normal variances will likely follow in future months. While it is recommended that variances be calculated monthly, no corrective action with the employees appears necessary.

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Ans: Amount in $ 1. Calculation of budgeted cost of direct labour for 600 detailing jobs: Particulars Skilled ($20 x 3 hours) Unskilled ($10 x 2 hours) Cost per job Number of jobs Total budgeted cost (cost per job X No. of jobs) Amount in $ 60.00 20.00 80.00 600.00 48,000.00 $ 2. Calculation of $1,151 favourable rate variance, $1,560 unfavourable labor efficiency variance and flexible budget variance in terms of labor: Labor type Actual cost Actual quantity X Actual price $39,117 $9,292 $48,409 Budgeted cost Actual quantity X Budgeted price (2,006 × $20) = $40,120 (944 x $10) = $9,440 $49,560 Flexible budget cost Budgeted quantity X Budgeted price (1,800 $20) = $36,000 (1,200 x $10) = $12,000 $48,000 Skilled Unskilled $1,115 Favourable Total price variance $1,560 Unfavourable Total efficiency variance $409 Unfavourable Total flexible budget variance

3 In a company where some workers are paid at higher wages and others are at lower, an unfavourable efficiency variance can occur. when higher-paid workers worked more than their standard time, an unfavourable efficiency variance will result. 3 4 Calculation of actual direct labor input mix and standard mix for labor: Labor type Actual mix Budgeted Mix Actual quantity of Input 2,006 hours 944 hours 2,950 hours 68% Skilled Unskilled Budgeted quantity of input for Actual output (3 hrs x 600unit) = 1,800 hrs (2 hrs x 600unit) = 1,200 hrs 3,000 hours 60% 32% 100% 40% 100% Total 3 5 Calculation of total direct labor mix and yield variances: Labor type Actual total input used X Actual input mix X Budgeted price (2,950X.68X20) = $40,120 (2,950X.32X10) = $9,440 $49,560 Actual total input used X Budgeted total input Budgeted input mix X allowed X Budgeted input Budgeted price mix X Budgeted price (2,950X 60X20) = $35,400 (3,000X.60X20) = $36,000 (2,950X.40X10) = $11,800 (3,000X.40X10) = $12,000 $47,200 $48,000 Skilled Unskilled $2,360 Unfavourable Total mix variance $800 Favourable Total yield variance $1,560 Unfavourable Total efficiency variance

6 When the efficiency variance was unfavourable, it was for the mix of labour not for the total hours used. The unfavourable mix variance is a result of a higher than the standard percentage of skilled labour (68% vs. 60%) used. The yield variance, which is a more correct measure of hours worked, is favourable because total hours (2,950) were actually lower than the standard for 600 detail jobs (3,000). The skilled labour workers have probably been able to work more quickly than the unskilled. In the above information regarding the vacancies in the unskilled positions, last month could be treated as an outlier (especially in terms of the mix of labour employed), and more normal variances will likely follow in future months. While it is recommended that variances be calculated monthly, no corrective action with the employees appears necessary.