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Labour Rate and Efficiency Variances

We answer the following,

A popular product of Loring Glassworks is a hand decorated vase. The company's standard cost system calls for 0.75 hours of direct labour per vase, at a standard wage rate of $8.25. During September, Loring Glassworks produced 4000 vases at an actual direct labour cost of $24,464 for 2,780 direct labor hours. What is the actual wage rate per hour? Compute the labor rate and efficiency variances for the month. Was paying workers the actual wage rather than the standard wage an efficient strategy for Loring?

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Let us calculate the actual wage rate per hour. The production for the month was 4000 vases at a cost of $24,464 for 2,780 direct labour hours. Then the wage rate per hour equals the labor cost divided by the number of direct labour hours, that is

- actual wage rate per hour=24,464/2,780=8.8

- So we have an actual wage rate per hour of $8.8

- Now the labour rate variance. The labour rate variance for the month is calculated as ...

Solution Summary

For the question of production of goods below we study whether paying a higher wage rate is a better strategy than paying the standard wage rate. With the given information we use the concepts of labor rate variance and labor efficiency variance to give an argument for our answer.