EXERCISE 8-5 Direct Labor Variances [LO8-5 SkyChefs, Inc., prepares in-flight me
ID: 2517823 • Letter: E
Question
EXERCISE 8-5 Direct Labor Variances [LO8-5 SkyChefs, Inc., prepares in-flight meals for a number of major airlines. One of the company's products is grilled salmon in dill sauce with baby new potatoes and spring vegetables. During the most recent week the company prepared 4,000 of these meals using 960 direct labor-hours. The company paid these direct labor workers a total of $9,600 for this work, or $10.00 per hour. According to the standard cost card for this meal, it should require 0.25 direct labor-hours at a cost of 9.75 per hour. Required: 1. According to the standards, what direct labor cost should have been incurred to prepare 4,000 meals? per How much does this differ from the actual direct labor cost? Break down the difference computed in (1)above into a labor rate variance and a labor efficiency variance. 2.Explanation / Answer
1. Direct labor cost that should have been incurred to prepare 4000 meals:
Standard labor hours = 4000*0.25 = 1000 hours
Standard labor rate = $9.75 per hour
Standard labor cost for 4000 meals = 1000*9.75 =$9750
Difference between Actual labor cost and Standard labor cost = 9600-9750 =$150 (Favorable)
2. Direct labor variance = 9600-9750 =$150 (Favorable)
(i) Labor Rate variance = Actual hours*Actual Rate - Actual hours *Standard rate
= 960*10 - 960*9.75 = $240 Adverse
(ii) Labor Efficiency Variance = Actual hours *Standard Rate - Standard hours * Standard rate
= 960 * 9.75 - 1000*9.75 = $390 favorable
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