At Worthe Corporation, indirect labor is a variable cost that varies with direct labor-hours. Last month's performance report showed that actual indirect labor cost totaled $7,920 for the month and that the associated spending variance was $240 F. If 10,200 direct labor-hours were actually worked last month, then the flexible budget cost formula for indirect labor must be (per direct labor-hour) closest to:
A)$0.95
B)$0.90
C)$0.80
D)$0.85

Question

Quizplus · Accepted Answer

The spending variance formula is:
Actual Cost - (Standard Quantity x Standard Rate)

The spending variance given in the problem is $240 F, which means the actual cost is less than the expected cost. Therefore, the standard rate of indirect labor per direct labor-hour must be higher than the actual rate.

We can calculate the standard rate as follows:
Actual Cost = Standard Quantity x Standard Rate
$7,920 = 10,200 x Standard Rate
Standard Rate = $7,920 / 10,200 = $0.7778 or $0.78 (rounded)

Since the actual rate is less than the expected rate, we need to increase the rate by $0.02 to get a positive spending variance of $240. Therefore, the flexible budget cost formula for indirect labor per direct labor-hour must be (per direct labor-hour) closest to $0.80. (Option C)

At Worthe Corporation, Indirect Labor Is a Variable Cost That