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Solve: Direct Labor Variances

XYZ Products uses a standard costing system to assist in the evaluation of operations. The company has had considerable employee difficulties in recent months, so much so that management had hired a new production supervisor. The new supervisor has been on the job for six months and has seemingly brought order to an otherwise chaotic situation.

The vice president of manufacturing recently commented that "the new supervisor has really done the trick. His team building/ morale building exercises, have truly brought things under control". The vice president's comments were based on both a plant tour, where he observed a contented work force, and a review of a performance report that showed a total labor variance if $14,000. The variance is truly outstanding, given that it is less than 2% of the company's budgeted labor cost. Additional data follow.

- Total completed production amounted to 20,000 units.

- A review of the firm's standard cost records found that each completed unit requires 2.75 hours of labor at $14 per hour. XYZ's production actually required 42,000 labor hours at a total of $756,000.

A. As judged by the information contained in the performance report, should the vice president be concerned about the company's labor variances? Why?
B. Calculate XYZ's direct labor variances.
C. On the basis to your answers to requirement "B", should XYZ be concerned about its labor situation? Why?
D. Briefly analyze and explain the direct labor variances.

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Solution Preview

A. Yes the Vice President should be concerned. The overall variance is $14,000 and is less, but we should be looking at the breakup of the total variance in terms of rate and efficiency variance. It may be possible that one is high and ...

Solution Summary

In about 160 words, this solutions provides a step by step solution illustrating how to calculate the direct labour variances for Company XYZ. An analysis of the labour variances is also provided in detail.