Problem 9 - Accounting

Question

The Lifestyle Clothes Company produced 24,000 units during April of the current year. The Cutting Department used 4,000 direct labor hours at an actual rate of \(\$ 11.20\) per hour. The Sewing Department used 8,000 direct labor hours at an actual rate of \(\$ 10.50\) per hour. Assume there were no work in process inventories in either department at the beginning or end of the month. The standard labor rate is \(\$ 11.00\). The standard labor time for the Cutting and Sewing departments is \(0.15\) hour and \(0.35\) hour per unit, respectively. a. Determine the direct labor rate and time variance for the (1) Cutting Department and (2) Sewing Department. b. Interpret your results.

Step-by-Step Solution

Answer

Cutting Department has an unfavorable variance, while Sewing Department has a favorable variance.

Step 1: Calculate Standard Hours for Cutting

The standard labor time for the Cutting Department is 0.15 hours per unit. Therefore, for 24,000 units, the standard hours are:\[24,000 \text{ units} \times 0.15 \text{ hours/unit} = 3,600 \text{ hours}\]

Step 2: Calculate Standard Hours for Sewing

The standard labor time for the Sewing Department is 0.35 hours per unit. Thus, for 24,000 units, the standard hours are:\[24,000 \text{ units} \times 0.35 \text{ hours/unit} = 8,400 \text{ hours}\]

Step 3: Determine Labor Rate Variance for Cutting

The labor rate variance is calculated as:\[\text{(Actual Rate - Standard Rate) } \times \text{ Actual Hours}\]For the Cutting Department:\[(11.20 - 11.00) \times 4,000 = 0.20 \times 4,000 = 800 \text{ (unfavorable)}\]

Step 4: Determine Labor Time Variance for Cutting

The labor time variance is calculated as:\[\text{(Actual Hours - Standard Hours) } \times \text{ Standard Rate}\]For the Cutting Department:\[(4,000 - 3,600) \times 11.00 = 400 \times 11 = 4,400 \text{ (unfavorable)}\]

Step 5: Determine Labor Rate Variance for Sewing

For the Sewing Department, the labor rate variance is calculated as:\[(10.50 - 11.00) \times 8,000 = (-0.50) \times 8,000 = -4,000 \text{ (favorable)}\]

Step 6: Determine Labor Time Variance for Sewing

For the Sewing Department, the labor time variance is:\[(8,000 - 8,400) \times 11.00 = (-400) \times 11 = -4,400 \text{ (favorable)}\]

Step 7: Interpretation of Results

The Cutting Department faced an unfavorable labor rate and time variance, indicating that both the actual rate was higher, and more hours were used than expected. Conversely, the Sewing Department achieved a favorable rate and time variance, as they managed to work for fewer hours, and the rate they paid was less than the standard, saving costs.

Key Concepts

Direct Labor

Direct labor is an essential component in any manufacturing process, including both the people and the hours they invest in creating products. It refers specifically to the employees who are directly involved in transforming raw materials into finished goods. In the context of Lifestyle Clothes Company, direct labor is the effort expended in the Cutting and Sewing Departments. This labor is measured in hours, and these hours are directly responsible for the production of the 24,000 units in question.

Direct labor impacts costs significantly due to wages paid to workers. Thus, companies need to monitor direct labor usage closely to ensure productivity and cost efficiency. By understanding and controlling direct labor, companies can streamline their operations and improve profitability.

Standard Costs

Standard costs are predetermined cost metrics used as a benchmark to compare actual performance. They are essential for cost control and planning purposes. In manufacturing, standard costs are often set for materials, labor, and overheads.

For direct labor, standard costs include the standard labor rate and the standard labor hours necessary to complete a task or produce a unit. At Lifestyle Clothes Company, the standard labor rate is set at \(\$11.00\) per hour. They allocate 0.15 hours per unit for Cutting and 0.35 hours per unit for Sewing. These standards allow the company to predict production costs more accurately and compare these estimates to actual expenses to identify variances.

Standard costs serve as a tool for operational efficiency and cost management. By maintaining or improving upon these benchmarks, businesses can enhance their competitiveness.

Labor Rate Variance

Labor rate variance evaluates the difference between what was actually paid to workers (actual rate) and what was expected to be paid (standard rate). It's calculated by multiplying the difference between actual and standard rates by the actual hours worked.

For example, at Lifestyle Clothes Company, the Cutting Department incurred an unfavorable labor rate variance of \(\\(800\), calculated as \( (11.20 - 11.00) \times 4,000 = 0.20 \times 4,000\). This indicates they spent more per hour on labor than anticipated. Meanwhile, the Sewing Department had a favorable variance of \(\\)-4,000\), indicating they paid less per hour than the standard cost.

This variance gives management insight into whether they are maintaining control over labor costs effectively. It also highlights areas where adjustments may be needed, whether through renegotiating wages or improving hiring strategies.

Labor Time Variance

Labor time variance measures the efficiency of labor usage. It is determined by comparing the actual hours worked to the standard hours allowed for the actual output, multiplied by the standard rate.

In the case of Lifestyle Clothes Company, the Cutting Department experienced an unfavorable labor time variance of \(\\(4,400\) because more hours were worked than standard allowances. Calculated as \( (4,000 - 3,600) \times 11.00 = 400 \times 11\), this metric highlights inefficiencies. The Sewing Department, on the other hand, achieved a favorable variance of \(\\)-4,400\) as they worked less than the standard hours required.

Understanding and analyzing labor time variance assists a company in identifying inefficiencies or bottlenecks in the production process. Addressing these issues can lead to more cost-effective operations and improved use of resources.