Question

1. Direct Labor Variances for a Service Company

   Mexicali On the Go Inc. owns and operates food trucks (mobile kitchens) throughout the west coast. The company’s employees have varying wage levels depending on their experience and length of time with the company. Employees work 8-hour shifts and are assigned to a truck each day based on labor needs to support the daily menu. One of its trucks, Donna’s Mobile Fiesta offers a single menu item that changes daily. On May 6, the truck prepared 70 of its most popular item, the Breakfast Enchilada. The following data are available for that day:

   Quantity of direct labor used	16 hrs.
   (2 employees, working 8-hour shifts)
   Actual rate for direct labor	$15.40 per hr.
   Standard direct labor per meal	0.2 hr.
   Standard rate for direct labor	$16.00 per hr.

   a. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Round your answers to two decimal places.

   Direct Labor Rate Variance	$	Favorable
   Direct Labor Time Variance	$	Unfavorable
   Total Direct Labor Cost Variance	$	Unfavorable Favorable Unfavorable

   b. Discuss what might have caused these variances.
   
   Unfavorable time variance will occur any time the number of meals actually made falls below the maximum number of meals that could be generated by employees in the mobile kitchen.

Answer 1

Solution a:

Direct Labor Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
16	$15.40	$246.40			16	$16.00	$256.00			14	$16.00	$224.00
			$9.60	F				$32.00	U
			Direct Labor rate Variance					Direct Labor Efficiency Variance
Direct Labor Rate variance					$9.60	F
Direct Labor Efficiency variance					$32.00	U
Direct labor cost variance					$22.40	U

Solution b:

Unfavorable time variance will occur any time the number of meals actually made falls below the maximum number of meals that could be generated by employees in the mobile kitchen.