=+12-35 K Direct manufacturing labour and variable manufacturing overhead variances OBJECTIVE 3 Maz’s Art Supply Company produces various types of paints. Actual direct manufacturing labour-hours in the factory that produces paint have been higher than budgeted hours for the last few months and the owner, Maz 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 direct manufacturing labour-hours, Maz 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 2016:

Budget information Actual results Paint set production 25 000 29 000 Direct manufacturing labour-hours per paint set 2 hours 2.3 hours Direct manufacturing labour rate $10/hour $10.40/hour Variable manufacturing overhead rate $20/hour $18.95/hour 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 spending 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/spending variances help Maz explain the efficiency variances?

4 Is Maz 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?