Zinn Corporation recently agreed to a union contract provision that guarantees a minimum wage of $1,250 per month to each direct labour employee equivalent to 125 hours of work each month. Currently, 125 employees are covered by this provision. All direct labour employees are paid $10 per hour. Thus, until an employeeworks 125 hours, the remenuration is a fixed $1,250 per employee each month. Rusty Zinn, the assistant to the accountant was given the task of budgeting for the direct labour cost. Because of the contract provision, Rusty decided that the $156,250 (= 125 ? $1,250 per month) should be treated as a fixed monthly cost. Rusty was instructed to calculate each month?s budget using the following formula: $156,250+$7 per direct labour-hour.

Figures for the first three months of the fiscal year are as follows:

These figures are a source of concern because they show unfavourable variances when production is high, and favourable variances during slow months. The factory manager is certain that this trend does not reflect reality.

Required:

1. Explain why the variance is favourable during slow months and unfavourable in months when production is high. A diagram may help you to develop an explanation.

2. Develop a formula for direct labour costs more appropriate to the actual cost behaviour, then recalculate the variances for April, May, and June.

Transcribed Image Text:

June April May Direct labour-hours planned and worked 27,500 40,000 60,000 Direct labour costs budgeted $436,250 $576,250 $348,750 Direct labour costs incurred $400,000 $275,000 $600,000 $36,250F Variance $73,750F $23,750U