NEO Foundary, Inc. manufactures casting that other companies use in the producti

Question

NEO Foundary, Inc. manufactures casting that other companies use in the production of machinery. For the past two years, NEO's best-selling products has been a casting for an eight-cylinder engine block. Standard direct labor hours per engine block are 1.8 hours. A labor union contract requires that the company pay all direct labor employees $14 per hour. During June, NEO produced 16,500 engine blocks. Actual direct labor hours and costs for the month were 29,900 and $433,550, respectively.

1. Compute the direct labor rate variance for eight-cylinder engine blocks during June.

2. Using the same data, compute the direct labor efficiency variance for eight-cylinder engine blocks during June. Check your answer, assuming that the total direct labor cost variance is $17,750 (U).

Explanation / Answer

1. Direct labor rate variance= (AP*-SP) x AH

*AP= Actual costs ($433,550) - actual hours (29,900) = $14.5

Variance= (14.5 - 14) x 29,900 = $14,950 U

2. Direct labor efficiency variance= (AH - SH*) x SP

SH= standard hours per unit (1.8) x units produced (16,500) = 29,700

Variance= (29,900 - 29,700) x $14 = $2,800 U

Check:

Total direct labor variance= $17,750 U

14,950 + 2,800 = 17,750

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