Zinn Corporation recently agreed to a union contract provision that guarantees a minimum wage of $1,430 per month to each direct labour employee equivalent to 130 hours of work each month. Currently, 130 employees are covered by this provision. All direct labour employees are paid $11 per hour. Thus, until an employee works 130 hours, the remuneration is a fixed $1,430 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 $185,900 (= 130 $1,430 per month) should be treated as a fixed monthly cost. Rusty was instructed to calculate each month's budget using the following formula: $185,900 + $7 per direct labour-hour.

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

AprilMayJuneDirect labour-hours planned and worked24,00035,00055,000Direct labour costs budgeted$353,900$430,900$570,900Direct labour costs incurred$264,000$385,000$605,000Variance$89,900F$45,900F$34,100U

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.This part of the question is not part of your Connect assignment.

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