At Rost 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 $7,540 for the month and that the associated spending variance was $560 F.If 10,800 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) $0.75
B) $0.80
C) $0.85
D) $0.65

Question

Arthur Fabella · Accepted Answer

Final Answer : A, Explanation :  The formula for calculating the flexible budget for indirect labor is:Flexible budget for indirect labor = Variable overhead rate x Actual direct labor-hoursWe are given the following information:Actual indirect labor cost = $7,540Spending variance = $560 F (i.e. favorable)Actual direct labor-hours = 10,800Since the spending variance is favorable, it means that the actual cost of indirect labor was less than the budgeted cost. This could be due to lower variable overhead rates or lower direct labor-hours.Using the formula for the spending variance, we have:Spending variance = Actual indirect labor cost - Budgeted indirect labor cost$560 F = $7,540 - Budgeted indirect labor costBudgeted indirect labor cost = $7,540 + $560 = $8,100Now, we can calculate the variable overhead rate as:Variable overhead rate = Budgeted indirect labor cost / Budgeted direct labor-hoursVariable overhead rate = $8,100 / 10,800 = $0.75 per direct labor-hourTherefore, the closest option to the flexible budget cost formula for indirect labor is option A) $0.75.   Favorable Spending Variance implies Actual Results  < Flexible Budget$560 = Flexible budget - Actual results$560 = Flexible budget - $7,540Flexible budget = $7,540 + $560 = $8,100Flexible budget = Variable cost per unit of output × 10,800 units$8,100 = Variable cost per unit of output × 10,800 unitsVariable cost per unit of output = $8,100 ÷ 10,800 units = $0.75 per unit

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