Question

2. Joe Malay received the following report on the Division's operation for the month of August: Direct labor rate variance = $25,000 unfavorable; Direct labor efficiency variance = $70,000 (?). The standard calls for 3 direct labor hours per unit of output at $28 per labor hour (SP). The standard direct labor hours for the units manufactured (SQ) is 20 percent more than the total direct labor hours actually worked (AQ) in August.

What was the average direct labor hourly rate (AP) the Division paid in August?

Select one:

a. $24.00

b. $26.00

c. $28.00

d. $30.00

e. $31.25

3James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income (RI) method. Webb is reviewing the followed forecasted information for his division for the coming year:

Category	Amount (thousands)
Current assets (e.g., inventory)	$1,800
Revenue	30,000
Plant and equipment (net book value)	17,200

If the imputed interest charge (i.e., divisional cost of capital) is 15% and Webb wants to achieve an RI target of $2 million, what will costs have to be in order to achieve the target?  

Select one:

a. $9,000,000

b. $10,800,000

c. $23,620,000

d. $25,150,000

e. $25,690,000

Answer 1

2. Solution: The correct option is “d” i.e $ 30 (Refer Note below)

Note:

Since given that the standard direct labor hours for the units manufactured (SQ) is 20 percent more than the total direct labor hours actually worked (AQ) in August, the labor efficiency variance is favorable

(Standard hours for actual output-Actual hours worked)*Standard Rate per hour=$ 70000(F)

Let Actual hours worked per unit of output = “X”

Therefore Standard hours per unit of output =1.2 X

Therefore 1.2X=3 i.e X=2.5 hours i.e Actual Hours worked per unit of output=2.5 hours

Let Actual units of output = “Y”

(3Y-2.5Y) $ 28/labor hour=70000

0.5 Y=2500 i.e Y=5000 units

Given the Direct Labor Rate Variance=$ 25000 U

(Standard Rate per hour-Actual Rate Per hour)Actual hours=$ 25000(U)

Actual hours= 2.5 hours per unit*5000 units=12500 hours

($ 28 per hour-Actual rate per hour) 12500 hours=-25000

Therefore $ 28+$ 2= Actual rate per hour i.e Actual labor rate per hour=$ 30 per hour