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7-39 (35 min.) Direct labor variances: price, efficiency, mix and yield.
Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has
been making guitars for 20 years and is paid $30 per hour. The second worker, Earl, is less
experienced and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The
budgeted direct labor quantities and prices for one guitar are as follows:
That is, each guitar is budgeted to require 10 hours of direct labor, composed of 60% of George’s
labor and 40% of Earl’s, although sometimes Earl works more hours on a particular guitar and
George less, or vice versa, with no obvious change in the quality or function of the guitar.
During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as
follows:
Required:
1. What is the budgeted cost of direct labor for 25 guitars?
2. Calculate the total direct labor price and efficiency variances.
3. For the 25 guitars, what is the total actual amount of direct labor used? What is the actual
direct labor input mix percentage? What is the budgeted amount of George’s and Earl’s labor
that should have been used for the 25 guitars?
4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the
total direct labor efficiency variance? What do these variances tell you?
SOLUTION
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• SOLUTION EXHIBIT 7-39A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Trevor Joseph Guitars
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
Actual Input Quantity
× Budgeted Price
(2)
George
Earl
145 × $30 = $4,350
108 × $20 = 2,160
$6,510
145 × $30 = $4,350
108 × $20 = 2,160
$6,510
$0 $10 U
Total price variance Total efficiency variance
$10 U
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3.
Actual Quantity
of Input
Actual
Mix
Budgeted Quantity
of Input for Actual Output
Budgeted
Mix
George
145 hours
57.3%
6 hours × 25 units = 150 hours
60%
Earl
108 hours
42.7%
4 hours × 25 units = 100 hours
40%
Total
253 hours
100.0%
250 hours
100%
4. Solution Exhibit 7-39B presents the total direct labor yield and mix variances for Trevor
Joseph Guitars.
The total direct labor yield variance can also be computed as the sum of the direct labor
yield variances for each input:
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=
×
×
George = (253 – 250) × 0.60 × $30 = 3 × 0.60 × $30 = $54 U
Earl = (253 – 250) × 0.40 × $20 = 3 × 0.40 × $20 = 24 U
Total direct labor yield variance $78 U
The total direct labor mix variance can also be computed as the sum of the direct labor mix
variances for each input:
=
×
×
George = (0.573 – 0.60) × 253 × $30 = 0.027 × 253 × $30 = $205 F
Earl = (0.427 – 0.40) × 253 × $20 = –0.027 × 253 × $20= 137 U
Total direct labor mix variance $ 68 F
The sum of the direct labor mix variance and the direct labor yield variance equals the direct
labor efficiency variance. The favorable mix variance arises from using more of the cheaper
labor (and less of the costlier labor) than the budgeted mix. The yield variance indicates that the
guitars required more total inputs (253 hours) than expected (250 hours) for the production of 25
guitars. Both variances are relatively small and probably within tolerable limits. It is likely that
Earl, who is less experienced, worked more slowly than George, which caused the unfavorable
yield variance. Trevor Joseph should be careful that using more of the cheaper labor does not
reduce the quality of the guitar or how customers perceive it.
• SOLUTION EXHIBIT 7-39B
Columnar Presentation of Direct Labor Yield and Mix Variances for Trevor Joseph Guitars
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
George 253 × 0.573 × $30 = $4,349
Earl 253 × 0.427 × $20 = 2,161
$6,510
68 F $78 U
Direct labor
yield
variance for
each input
Actual total
quantity of all
direct labor
inputs used
Budgeted total quantity of
all direct labor inputs
allowed for actual output
–
Budgeted direct
labor input mix
percentage
Budgeted price
of direct labor
inputs
Direct labor
mix
variance for
each input
Actual direct
labor input
mix
percentage
Budgeted direct
labor input mix
percentage
–
Actual total
quantity of all
direct labor
inputs used
Budgeted price
of direct labor
inputs
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Total mix variance Total yield variance
$10 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
7-40 (30 min.) Direct-cost and selling price variances.
MicroDisk is the market leader in the Secure Digital (SD) card industry and sells memory cards
for use in portable devices such as mobile phones, tablets, and digital cameras. Its most popular
card is the Mini SD, which it sells to OEMs as well as through outlets such as Target and
Walmart for an average selling price of $8. MicroDisk has a standard monthly production level
of 420,000 Mini SDs in its Taiwan facility. The standard input quantities and prices for direct-
cost inputs are as follows:
Phoebe King, the CEO, is disappointed with the results for June 2014, especially in comparison
to her expectations based on the standard cost data.
King observes that despite the significant increase in the output of Mini SDs in June, the
product’s contribution to the company’s profitability has been lower than expected. She gathers
the following information to help analyze the situation:
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Calculate the following variances. Comment on the variances and provide potential reasons why
they might have arisen, with particular attention to the variances that may be related to one
another:
Required:
1. Selling-price variance
2. Direct materials price variance, for each category of materials
3. Direct materials efficiency variance, for each category of materials
4. Direct manufacturing labor price variance, for setup and fabrication
5. Direct manufacturing labor efficiency variance, for setup and fabrication.
SOLUTION
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7-41 (60 min.) Comprehensive variance analysis review.
Vivus Bioscience produces a generic statin pill that is used to treat patients with high cholesterol.
The pills are sold in blister packs of 10. Vivus employs a team of sales representatives who are
paid varying amounts of commission.
Given the narrow margins in the generic drugs industry, Vivus relies on tight standards and
cost controls to manage its operations. Vivus has the following budgeted standards for the month
of April 2014:
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Vivus budgeted sales of 1,400,000 packs for April. At the end of the month, the controller
revealed that actual results for April had deviated from the budget in several ways:
▪ Unit sales and production were 90% of plan.
▪ Actual average selling price increased to $7.30.
▪ Productivity dropped to 250 packs per hour.
▪ Actual direct manufacturing labor cost was $14.60 per hour.
▪ Actual total direct material cost per unit increased to $1.90.
▪ Actual sales commissions were $0.30 per unit.
▪ Fixed overhead costs were $12,000 above budget.
Calculate the following amounts for Vivus for April 2014:
Required:
1. Static-budget and actual operating income
2. Static-budget variance for operating income
3. Flexible-budget operating income
4. Flexible-budget variance for operating income
5. Sales-volume variance for operating income
6. Price and efficiency variances for direct manufacturing labor
7. Flexible-budget variance for direct manufacturing labor
SOLUTION
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7-42 (30 min.) Price and efficiency variances, benchmarking and ethics.
Sunto Scientific manufactures GPS devices for a chain of retail stores. Its most popular model,
the Magellan XS, is assembled in a dedicated facility in Savannah, Georgia. Sunto is keenly
aware of the competitive threat from smartphones that use Google Maps and has put in a
standard cost system to manage production of the Magellan XS. It has also implemented a just–
in-time system so the Savannah facility operates with no inventory of any kind.
Producing the Magellan XS involves combining a navigation system (imported from Sunto’s
plant in Dresden at a fixed price), an LCD screen made of polarized glass, and a casing
developed from specialty plastic. The budgeted and actual amounts for Magellan XS for July
2014 were as follows:
The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing
system in place. The standards were developed on the basis of a study done by an outside
consultant at the start of the year. Williams points out that he has rarely seen a significant
unfavorable variance under this system. He observes that even at the present level of output,
workers seem to have a substantial amount of idle time. Moreover, he is concerned that the
production supervisor, John Kelso, is aware of the issue but is unwilling to tighten the standards
because the current lenient benchmarks make his performance look good.
Required:
1. Compute the price and efficiency variances for the three categories of direct materials and for
direct manufacturing labor in July 2014.
2. Describe the types of actions the employees at the Savannah plant may have taken to reduce
the accuracy of the standards set by the outside consultant. Why would employees take those
actions? Is this behavior ethical?
3. If Williams does nothing about the standard costs, will his behavior violate any of the
standards of ethical conduct for practitioners described in the IMA Statement of Ethical
Professional Practice (see Exhibit 1-7 on page 18)?
4. What actions should Williams take?
5. Williams can obtain benchmarking information about the estimated costs of Sunto’s
competitors such as Garmin and TomTom from the Competitive Intelligence Institute (CII).
Discuss the pros and cons of using the CII information to compute the variances in
requirement 1.
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SOLUTION
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