Question

Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk. She smiled as her eyes went straight to the bottom line of the report and saw the favorable variance for operating income, confirming her decision to push the workers to get those last 270 cases off the production line before the end of the month.

But as she glanced over the rest of numbers, Lexi couldn’t help but wonder if there were errors in some of the line items. She was puzzled at how most of the operating expenses could be higher than the budget since she had worked hard to manage the production line to improve efficiency and reduce costs. Yet the report, shown below, showed a different story.

		Actual			Budget			Variance
Cases produced and sold		10,250			9,980			270	Favorable
Sales revenue		$1,943,600			$1,866,300			$77,300	Favorable
Less variable expenses
Direct material		559,878			548,900			10,978	Unfavorable
Direct labor		267,115			259,480			7,635	Unfavorable
Variable manufacturing overhead		284,442			279,440			5,002	Unfavorable
Variable selling expenses		92,944			89,820			3,124	Unfavorable
Variable administrative expenses		41,657			39,920			1,737	Unfavorable
Total variable expense		1,246,036			1,217,560			28,476	Unfavorable
Contribution margin		697,564			648,740			48,824	Favorable
Less fixed expenses
Fixed manufacturing overhead		110,778			109,780			998	Unfavorable
Fixed selling expenses		69,361			69,860			(499	Favorable)
Fixed administrative expenses		129,540			129,740			(200	Favorable)
Total fixed expense		309,679			309,380			299	Unfavorable
Operating income		$387,885			$339,360			$48,525	Favorable

Lexi picked up the phone and called Irvin. “Irvin, I don’t get it. We beat the budgeted operating income for the month, but look at all the unfavorable variances on the operating costs. Can you help me understand what’s going on?” “Let me look into it and I’ll get back to you,” Irvin replied.

Irvin gathered the following additional information about the month’s performance.

●		Direct materials purchased: 101,796 pounds at a total of $559,878
●		Direct materials used: 101,796 pounds
●		Direct labor hours worked: 26,447 at a total cost of $267,115
●		Machine hours used: 40,868

Irvin also found the standard cost card for a case of product.

		Standard Price		Standard Quantity		Standard Cost
Direct materials		$5.50 per pound		10 pounds		$55
Direct labor		$10 per DLH		2.59 DLH		25.90
Variable overhead		$7 per MH		4 MH		28.00
Fixed overhead		$2.74 per MH		4 MH		10.96
Total standard cost per case						$119.86

Calculate the direct labor rate variance and direct labor efficiency variance for the month. (Round answers to 0 decimal places, e.g. 1,525. If variance is zero, select "Not Applicable" and enter 0 for the amounts.)

Direct labor rate variance		$ Enter dollar amount	Favorable / Not Applicable / Unfavorable
Direct labor efficiency variance		$ Enter dollar amount	Not Applicable / Favorable / Unfavorable

Answer 1

Direct labor rate variance = (Standard rate - actual rate)* Actual hours worked

= ($10 - 267115/26447)*26447 = $2645 Unfavorable

Direct labor efficiency variance = (Standard hours - actual hours)*standard rate

= (10250*2.59 - 26447)*10 = $1005 Favorable