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Standard labor-hours allowed per unit of output 1.3 Standard variable overhead rate per standard direct labor-hour $ 28 Good units produced 60,000 Actual direct labor-hours worked 80,000 Actual total direct labor $ 1,617,000 Direct labor efficiency variance $ 38,000 U Actual variable overhead $ 2,037,000Compute the direct labor and variable overhead price and efficiency variances. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

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Answer:

Direct Labor rate (price) variance = $97,000 Unfavorable

Overhead efficiency variance = $56,000 Unfavorable

Overhead price variance = $203,000 Favorable  

Explanation:

First lets summarize the information.

Standard Information  

Labor hours  1.3 hrs /product

Variable cost/ hour $28

Actual Information  

Units Produced = 60000  

Total hours worked = 80000  which is 80000/60000 = 1.333 hrs/ product

Total labor expenditure = $1,617,000

Total Variable overhead = $2,037,000

DL efficiency variance = $38,000 U

Lets Solve first for direct labor price variance.

We need standard direct labor rate for this, we can reverse work it by using the efficiency variance provided.

Calculate Standard rate using the formula for efficiency variance as it is given so,

Direct labor efficiency variance = (Actual hours * Standard Rate) - (Standard Hours * Standard Rate)

Standard hours = (60000 units * 1.3/hours/standard unit) = 78000 hours

(38000) = 80000x - 78000x

X = 19/hour is the standard rate.

Now lets calculate Actual rate per hour as = Total labor expenditure / Total hours worked

So, 1617000 / 80000 = $20.2125 / hour worked is the actual labor rate.

With this information we can calculate direct labor price variance with the following formula:

Price variance = (Actual hours * Actual rate) - (Actual Hours * Standard rate)

Price Variance = 1617000 - (80000 * 19) = $97,000 Unfavorable since the actual cost paid is more than the standard cost.  

Lets calculate overhead price and efficiency variance.

Overhead efficiency variance = Standard overhead rate * (Actual Hours - Standard Hours)

So, $28 * (80000 - 78000) = $56000 Unfavorable since actual worked hours are more than standard.

Overhead price variance = Actual hours worked * ( Actual overhead rate - Standard overhead rate)

First we calculate Actual overhead rate/hour

Standard overhead rate = Total variable overhead / Total actual hours

Which is

SR = 2037000/ 80000 = $25.4625/ hour

So by using the previous formula,

Overhead price variance = 80000 * (25.4625 - 28)

= $203,000. Since the amount is negative, it means we have paid less than the standard cost thus the variance is favorable.

Hope that helps.

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