Mohammed Company employs a standard cost system. Mohammed has established the following standards for one unit of product:
$\begin{array} { | c | c | c | c|}
\hline& \text { Standard Quantity } & \text { Standard Price } & \text { Standard Cost } \
\hline \text { Direct materials } & 12.0 \text { pounds } & \$ 7.00 / \text { pound } & \$ 84.00 \
\text { Direct labor } & 2.6 \text { hours } & \$ 22.00 / \text { hour } & 57.20\\hline
\end{array}$
During June, Mohammed planned to produce 24,000 units of product. It purchased 330,000 pounds of direct material at a total cost of $2,343,000. The total factory wages for June were $1,440,000. Mohammed manufactured 25,000 units of product during June using 302,000 pounds of direct material and 64,000 direct labor hours. How much is the labor rate variance?

Question

Mohammed Company employs a standard cost system. Mohammed has established the following standards for one unit of product:
$\begin{array} { | c | c | c | c|} 
\hline& \text { Standard Quantity } & \text { Standard Price } & \text { Standard Cost } \
\hline \text { Direct materials } & 12.0 \text { pounds } & \$ 7.00 / \text { pound } & \$ 84.00 \
\text { Direct labor } & 2.6 \text { hours } & \$ 22.00 / \text { hour } & 57.20\\hline
\end{array}$
During June, Mohammed planned to produce 24,000 units of product. It purchased 330,000 pounds of direct material at a total cost of $2,343,000. The total factory wages for June were $1,440,000. Mohammed manufactured 25,000 units of product during June using 302,000 pounds of direct material and 64,000 direct labor hours. How much is the labor rate variance?

Quizplus · Accepted Answer

The labor rate variance is calculated as (Actual Hours x Actual Rate) - (Actual Hours x Standard Rate). The actual rate is $1,440,000 / 64,000 hours = $22.50/hour. The variance is (64,000 x $22.50) - (64,000 x $22.00) = $32,000 unfavorable.

Mohammed Company Employs a Standard Cost System During June, Mohammed Planned to Produce 24,000 Units of Product