Shade Company adopted a standard cost system several years ago. The standard cos

Question

Shade Company adopted a standard cost system several years ago. The standard costs for direct labor and direct materials for its single product are as follows: Materials (5 kilograms × $12.00/kilogram) = $60.00/unit. Direct labor (3.5 hours/unit × $20.00/hour) = $70.00/unit. All materials were issued at the beginning of processing. The operating data shown below were taken from the records for December:

The direct labor efficiency variance for December was:

$1,590 favorable.

$5,650 favorable.

$7,240 unfavorable.

$59,410 unfavorable.

In-process beginning inventory None In-process ending inventory—80% complete as to labor 960 units Units completed during the period 6,700 units Budgeted output 7,200 units Purchases of materials (in kilograms) 40,000 Total actual direct labor cost incurred $528,410 Direct labor hours worked (AQ) 26,500 hours Materials purchase-price variance $1,600 favorable Increase in materials inventory in December 1,550 kilograms

Explanation / Answer

C. $7,240 unfavorable

Total equivalent units produced with respect to direct labor = units completed + equivalent units in ending WIP inventory (with respect to direct labor) = 6,700 units (given) + (960 × 0.8) = 7,468 units

Standard labor hours allowed = units produced (with respect to direct labor) × standard direct labor hours/unit = 7,468 units × 5 hours/unit (given) = 26,138 standard hours allowed = SQ

Direct labor efficiency variance = (AQ - SQ) × SP = (26,500 (given) - 26,138) hours × $20/hour (given) = $7,240 unfavorable

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