Fifteen minutes of direct labour is needed to produce one unit of product and direct labour is paid $20 per hour. Budgeted output for the period is estimated to be 14 000 units. Actual output for the period turns out to be 14 600 units and actual labour costs are $77 900. What budgeted direct labour amount should actual direct labour costs be compared to in order to calculate a valid variance?
A) $70 000
B) $73 000
C) $56 000
D) $58 400

Question

Quizplus · Accepted Answer

The budgeted direct labour cost for producing 14,000 units can be calculated as follows: 
Direct labour cost per unit = 15 minutes/60 minutes x $20 = $5 
Total direct labour cost for producing 14,000 units = $5 x 14,000 = $70,000

However, the actual output for the period is 14,600 units. Therefore, the budgeted direct labour cost for producing 14,600 units would be: 
Direct labour cost per unit = 15 minutes/60 minutes x $20 = $5 
Total direct labour cost for producing 14,600 units = $5 x 14,600 = $73,000

Thus, the actual direct labour cost should be compared to the budgeted direct labour cost of $73,000 in order to calculate a valid variance. Option B is the correct answer.

Fifteen Minutes of Direct Labour Is Needed to Produce One