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Multiple Choice QuestionABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ $1.00 per pound; Direct labor: 1 hour @ $10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of $17,280; Direct labor: 36,000 hours at a total cost of $374,400. Compute the labor efficiency variance.Multiple choice question.$14,400 F$10,000 F$10,000 U$14,400 U

Question

Multiple Choice QuestionABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ 1.00perpound;Directlabor:1hour@1.00 per pound; Direct labor: 1 hour @ 10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of 17,280;Directlabor:36,000hoursatatotalcostof17,280; Direct labor: 36,000 hours at a total cost of 374,400. Compute the labor efficiency variance.Multiple choice question.14,400F14,400 F10,000 F10,000U10,000 U14,400 U

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Solution

To calculate the labor efficiency variance, we first need to determine the standard labor hours for the actual level of output and then compare it with the actual labor hours used.

  1. Calculate Standard Labor Hours for Actual Output: The company produced 35,000 units and the standard set by the company is 1 labor hour per unit. So, the standard labor hours for the actual output would be 35,000 units * 1 hour/unit = 35,000 hours.

  2. Compare Standard Labor Hours with Actual Labor Hours: The actual labor hours used were 36,000 hours. So, the difference between the standard and actual labor hours is 36,000 hours - 35,000 hours = 1,000 hours. This is the efficiency variance in terms of hours.

  3. Convert Hours Variance to Dollar Amount: The standard cost of labor per hour is 10.00.So,thelaborefficiencyvarianceintermsofdollarswouldbe1,000hours∗10.00. So, the labor efficiency variance in terms of dollars would be 1,000 hours * 10.00/hour = $10,000.

  4. Determine Whether Variance is Favorable or Unfavorable: Since the actual labor hours used were more than the standard labor hours for the actual output, this is an unfavorable variance.

So, the labor efficiency variance is 10,000Unfavorable,whichcorrespondstooptionC:10,000 Unfavorable, which corresponds to option C: 10,000 U.

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