Explaining the relationship between the labour efficiency variance and the variable overhead.
The Moore Company manufactures and sells a single product. The company standard cost card for a unit of the product included the following for direct materials and direct labor:
Direct materials:4 meters at $4.00 per meter and $16.00
Direct labor:1.5 hours at $10.00 per hour and $15.00
The company controls manufacturing overhead costs with overhead flexible budget. The flexible budget for manufacturing overhead costs for 2006 at three levels of activity (measured in direct labor hours) was as follows:
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ACTIVITY LEVELS
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Direct labour hours
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17,000
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22,500
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27,000
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Total variable manufacturing overhead cost
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$51,000
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$67,500
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$81,000
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Total fixed manufacturing overhead cost
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157,500
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157,500
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157,500
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Total
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$208,500
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$225,000
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$238,500
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For product costing purposes, the company applies manufacturing overhead costs to the product on the basis of direct labor hours and a denominator activity level of 22,500 hours (equivalent of 15,000 units of the product).
Actual operating data and cost information for the year were as follows:
1.Output: 18,000 units of the product
2.Purchased 80,000 meters of direct materials at a total cost of $336,000. 70,000 meters of this material was used to manufacture the 18,000 units.
3.Incurred total direct labor cost of $277,875 for 29,250 direct labor hours worked.
4.Incurred fixed manufacturing overhead costs of $156,000 and variable manufacturing overhead costs of $102,375.
Required
Note: In the following calculations that involve variances, indicate whether a variance is favorable (F) or unfavorable (U).
Explain the relationship between the labor efficiency variance and the variable overhead efficiency variance.