Emerald Marind Stores company manufactures special metallic materials and decora

Question

Emerald Marind Stores company manufactures special metallic materials and decoratiove fittins for luxury yachts that require highly skilled labor. Emerald used standards costs to prepare its flexible budget. For the first quarter of 2015, direct material and direct labor standards for one of their popular products were as follows: Direct material: 3 pounds per unit' $4 per pound Direct labor: 4 hours per unit; $15 per hour

Emerald produced 5,000 units during the quarter. At the end of the quarter, an examiniation of the labor costs record showed that the company used 25,000 direct labor hours and actual total direct labor costs were $275,000. The direct labor effiency variance was $75,000 U. Which of the following would be a logical explanation for this variance?

A) The company used more labor hours than allowed by the standards

B) The company paid a higher rate for labor thatn allowed by the standards

C) The company used a higher quantitiy of materials than allowed by the standards

D) The company paid a higher price for the materials than allowed by the standards

Explanation / Answer

Direct labour efficiency variance=Actual hours * Standard rate –Standard hours * Standard rate

Actual labour hours=25000

Actual direct labour cost=275000

Actual labour rate=275000/25000=25 per hour

Standard rate=15 per hour

Number of units produced=5000 units

Standard hour per unit=4 hours

Standard hours required to produce 5000 units=5000*4=20000 hours

However, actual hours used to produce 5000 units=25000 hours

Direct labour efficiency variance=25000*15-20000*15=75000 U

This implies that the actual quantity of labour used exceeded the standard hours.

The company used more labor hours than allowed by the standards

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