Question
Zinn Corporation recently agreed to a union contract provision that guarantees a minimum wage of $1,960 per month to each direct labor employee equivalent to
Zinn Corporation recently agreed to a union contract provision that guarantees a minimum wage of $1,960 per month to each direct labor employee equivalent to 140 hours of work each month. Currently, 140 employees are covered by this provision. All direct labor employees are paid $14 per hour. Thus, until an employee works 140 hours, the remenuration is a fixed $1,960 per employee each month. Rusty Zinn, the assistant to the accountant was given the task of budgeting for the direct labor cost. Because of the contract provision, Rusty decided that the $274,400 (= 140 $1,960 per month) should be treated as a fixed monthly cost. Rusty was instructed to calculate each month's budget using the following formula: $274,400 + $9 per direct labor-hour.
Figures for the first three months of the fiscal year are as follows:
April May June
Direct labor-hours planned and worked 25,500 38,000 58,000
Direct labor costs budgeted $503,900 $616,400 $796,400
Direct labor costs incurred $357,000 $532,000 $812,000
Variance $146,900F $84,400F $15,600U
These figures are a source of concern because they show unfavorable variances when production is high, and favorable variances during slow months. The factory manager is certain that this trend does not reflect reality.
Required:1.Not available in Connect.
2.Develop a formula for direct labor costs more appropriate to the actual cost behavior, then recalculate the variances for April, May, and June.
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