Sarah Beth's Art Supply Company produces various types of paints. Actual direct manufacturing labour-hours (DMLH) in the factory that produces paint have been higher than budgeted hours for the last few months and the owner, Sarah B. Jones, is concerned about the effect this has had on the company's cost overruns. Because variable manufacturing overhead is allocated to units produced using DMLH, Sarah feels that the mismanagement of labour will have a twofold effect on company profitability. Following are the relevant budgeted and actual results for the second quarter of 2013.

REQUIRED
1. Calculate the direct manufacturing labour price and efficiency variances and indicate whether each is favourable (F) or unfavourable (U).
2. Calculate the variable manufacturing overhead rate and efficiency variances and indicate whether each is favourable (F) or unfavourable (U).
3. For both direct manufacturing labour and variable manufacturing overhead, do the price/ rate variances help Sarah explain the efficiency variances?
4. Is Sarah correct in her assertion that the mismanagement of labour has a twofold effect on cost overruns? Why might the variable manufacturing overhead efficiency variance not be an accurate representation of the effect of labour overruns on variable manufacturing overhead costs?

Transcribed Image Text:

Budget Actual Information Results Paint set production Direct manufacturing labour-hours 10,000 13,000 (DMLH) per paint set Direct manufacturing labour rate Variable manufacturing overhead rate 0.5 DMLH S20.00/DMLH S 10/DMLH 0.75 DMLH $20.20/DMLH $ 9.75/DMLH