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Labour Rate and Efficiency Variances

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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.

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Direct Labor Efficiency Variance and Direct Labor Rate Variance

Explorer Inc, manufactures lanterns for camping. the company's direct labor rates have been set by the terms of the current labor contract. Direct labor rate standards have been assigned for each job classification. In May 20xx, a young apprentice was being trained during regular working hours to become a machine operator on one of the turret lathes. A timekeeper determined that the apprentice had spent a total of 48 hours as a novice machine operator in May. Standard time for the same work output is 32 hours. The apprentice earned $6.25 per hour in May. The standard labor rate for machine operators working on turret lathes is $10 per hour.

1) From the data provided, determine the direct labor efficiency variance and the direct labor rate variance that resulted from the temporary substitution of the apprentice for the regular machine operator. (per the labor contract, the apprentice is not entitled to the same rate as a reg machine operator during the training period)

2) Did the company benefit financially from the situation? Why or why not?

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