The Metal Machining Company specialises in manufacturing brake wheel cylinders f

Question

The Metal Machining Company specialises in manufacturing brake wheel cylinders for motor cars. It buys castings which are then turned, bored and polished. A standard cost system is employed. The standard prime cost data per wheel cylinder are as follows:

                        Casting                                                 $8.00

                        Direct labour - ½ hr @ $12 per hr              6.00

                        Standard prime cost                              $14.00

For the Turning Department the standard machine time for one cylinder is 5 minutes. Overhead in this department is allocated using standard machine hours as the cost driver. Budgeted overhead for the year consisted of $80 000 fixed costs and $120 000 variable costs.

Budgeted output for the year was 120 000 cylinders. Actual output was 100 800 units. Other results for the year were:

            Castings purchased and used - 101 000 @ $7.60             $767 600

            Direct labour - 55 000 hours @ $12.40 per hour             682 000

            Fixed overhead - Turning Department                                84 000

            Variable overhead - Turning Department                       116 000

            Machine hours - Turning Department                                  9 500

Find labor efficiency variable.

Explanation / Answer

Labor efficiency variance = Standard rate x (Actual hours – Standard hours)

Standard hours = Actual output x Standard hours per unit of output = 100800 units x ½ hour = 50400 hours

Labor efficiency variance = $12 x (55000 – 50400) = $12 x 4600 = $55200 Unfavorable

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