Direct labor variances: price, efficiency, mix and yield. ...

[jman1234]

Direct labor variances: price, efficiency, mix and yield.
 
  Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has been making guitars for 20 years and is paid 30 per hour. The second worker, Earl, is less experienced and is paid 20 per hour. One guitar requires, on average, 10 hours of labor. The budgeted direct labor quantities and prices for one guitar are as follows:
 
  That is, each guitar is budgeted to require 10 hours of direct labor, composed of 60 of George's labor and 40 of Earl's, although sometimes Earl works more hours on a particular guitar and George less, or vice versa, with no obvious change in the quality or function of the guitar.
  During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as follows:
 
  Required:
  1. What is the budgeted cost of direct labor for 25 guitars?
  2. Calculate the total direct labor price and efficiency variances.
  3. For the 25 guitars, what is the total actual amount of direct labor used? What is the actual direct labor input mix percentage? What is the budgeted amount of George's and Earl's labor that should have been used for the 25 guitars?
  4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the total direct labor efficiency variance? What do these variances tell you?

Question 2

Which of the following accounts in the ledger will ordinarily appear in the post-closing trial balance?
 a. Drawing
   b. Accounts Receivable
   c. Income from Services
   d. Supplies Expense
   e. Wages Expense

[hollysheppard095]

Answer to Question 1

1.
George (30  6 hrs.)  180
Earl (20  4 hrs.) 80
Cost per guitar  260
Number of guitars  25units
Total budgeted cost  6,500

2. Solution Exhibit 7- 39A presents the total price variance (0), the total efficiency variance (10 U), and the total flexible-budget variance (10U).

Total direct labor price variance can also be computed as:

=  

George = (30  30)  145 = 0
Earl = (20  20)  108 = 0
Total direct labor price variance 0

Total direct labor efficiency variance can also be computed as:
 
 =  

George = (145  150)  30.00 = 150 F
Earl = (108  100)  20.00 = 160 U
Total direct labor efficiency variance  10 U

 EXHIBIT 7- 39A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Trevor Joseph Guitars

Actual Costs
Incurred
(Actual Input Quantity
 Actual Price)
(1)

Actual Input Quantity
 Budgeted Price
(2) Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
 Budgeted Price)
(3)
George
Earl
145  30 = 4,350
108  20 = 2,160
6,510 145  30 = 4,350
108  20 = 2,160
6,510 150  30 = 4,500
100  20 = 2,000
6,500

0 10 U
Total price variance Total efficiency variance

10 U
Total flexible-budget variance

F = favorable effect on operating income; U = unfavorable effect on operating income

3.
Actual Quantity
of Input Actual Mix Budgeted Quantity
of Input for Actual Output Budgeted Mix
George 145 hours 57.3 6 hours  25 units = 150 hours 60
Earl 108 hours 42.7 4 hours  25 units = 100 hours 40
Total 253 hours 100.0 250 hours 100

4. Solution Exhibit 7- 39B presents the total direct labor yield and mix variances for Trevor Joseph Guitars.
The total direct labor yield variance can also be computed as the sum of the direct labor yield variances for each input:

=

 
 

George = (253  250)  0.60  30 = 3  0.60  30 = 54 U
Earl = (253  250)  0.40  20 = 3  0.40  20 = 24 U
Total direct labor yield variance 78 U

The total direct labor mix variance can also be computed as the sum of the direct labor mix variances for each input:

=

 
 

George = (0.573  0.60)  253  30 = 0.027  253  30 = 205 F
Earl = (0.427  0.40)  253  20 = 0.027  253  20= 137 U
Total direct labor mix variance  68 F

The sum of the direct labor mix variance and the direct labor yield variance equals the direct labor efficiency variance. The favorable mix variance arises from using more of the cheaper labor (and less of the costlier labor) than the budgeted mix. The yield variance indicates that the guitars required more total inputs (253 hours) than expected (250 hours) for the production of 25 guitars. Both variances are relatively small and probably within tolerable limits. It is likely that Earl, who is less experienced, worked more slowly than George, which caused the unfavorable yield variance. Trevor Joseph should be careful that using more of the cheaper labor does not reduce the quality of the guitar or how customers perceive it.

 EXHIBIT 7- 39B
Columnar Presentation of Direct Labor Yield and Mix Variances for Trevor Joseph Guitars

Actual Total Quantity
of All Inputs Used
 Actual Input Mix
 Budgeted Price
(1)

Actual Total Quantity
of All Inputs Used
 Budgeted Input Mix
 Budgeted Price
(2) Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output  
Budgeted Input Mix
 Budgeted Price
(3)

George 253  0.573  30 = 4,349
Earl 253  0.427  20 = 2,161
6,510

253  0.60  30 = 4,554
253  0.40  20 = 2,024
6,578
250  0.60  30 = 4,500
250  0.40  20 = 2,000
6,500
68 F 78 U
Total mix variance Total yield variance
10 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.

Answer to Question 2

b

[jman1234]

Excellent

[Viet Thy]

Gracias!