The accountant for Lovely Manufacturing Company compares each month’s actual results with a monthly Plan. The standard direct labour rates and the standard hours allowed, given the actual output in April, are shown in the following schedule:
A new union contract negotiated in March resulted in actual wage rates that differed from the standard rates. The actual direct labour hours worked and the actual direct labour rates per hour experienced for the month of April were as follows.
1 Calculate the following variances for April, indicating whether each is favourable or unfavourable:
(a) Direct labour rate variance for each labour class.
(b) Direct labour efficiency variance for each labour class.
2. Discuss the advantages and disadvantages of a standard costing system in which the standard direct labour rates per hour are not changed during the year to reflect events such as a new labour contract.
3. Construct an Excel® spreadsheet to solve requirement 1 above. Demonstrate how the solution will change if the following information changes: the actual labour rates were $27.00, $22.90 and $17.00 for labour classes III, II and I, respectively?