Tying It All Together Case 23-1 Before you begin this assignment, review the Tyi
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Question
Tying It All Together Case 23-1 Before you begin this assignment, review the Tying It All Togetherfeature in the chapter. Kellogg Company manufacturers and markets ready-to-eat cereal and convenience foods including Raisin Bran, Pop Tarts, Rice Krispies Treats, and Pringles. In addition to the raw materials used when producing its products, Kellogg Company also has significant labor costs associated with the products. As of January 2, 2016, Kellogg Company had approximately 33,577 employees. A shortage in the labor pool, regulatory measures, and other pressures could increase the company's labor cost, having a negative impact on the company's operating income. Requirements 1. Suppose Kellogg Company noticed an increase in its actual direct labor costs compared to the budgeted amount. How could Kellogg Company investigate this? 2. What is the direct labor cost variance and how would a company calculate this variance? 3. What is the direct labor efficiency variance and how would a company calculate this variance? 4. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor cost variance. What measures could Kellogg Company take to control this variance? 5. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor efficiency variance. What measures could Kellogg Company take to control this variance?Explanation / Answer
1. Budgeted Cost is the cost planned in the beginning of a period, which is the standard cost on carrying out a manufacturing activity. Actual cost refers to the cost actually incurred during period. When Kellog COmpany noticed an increase in its actual direct labour costs compared to the budgeted anount, it can be due to either labor rate variance or due to efficiency variance or both. So the company can investigate this by deep diving and separarting both the components.
2.Direct Labour Cost Variance is the difference between planned/Budgeted labor rate per hour and Actual Labour rate per hour incurred during a period
It can be calculated by using the following formula:
(Budgeted Rate per hour-Actual rate per hour) * Actual Payment Hours
3.Direct Labor is the variance related to the efficiency of workers. It is the difference between budgeted quantity and actual quantity produced
It can be calculated by using the following formula:
(Budgeted Quantity- Actual Quantity )*Standard Rate per hour
4. Company can reduce the actual direct labor paid to control this variance. If not possible, then budgets should be revised.
5. Company should take steps to improve the efficiency of workers by providing required training, supervision etc.
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