The 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 2015.
Budget Information Actual Results
Paint set production....................................10,000........................13,000
Direct manufacturing labour-hours
(DMLH) per paint set..............................0.5 DMLH.................0.75 DMLH
Direct manufacturing labour rate................$20/DMLH..............$20.20/DMLH
Variable manufacturing overhead rate..........$10/DMLH...............$ 9.75/DMLH
Required
1. Calculate the direct manufacturing labour rate 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 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?