Question

Kellogg Company manufacturers and markets ready-to-eat cereal and convenience foods including Raisin Bran, Pop Tarts, Rice Krispies Treats, and Pringles. In addition to the raw materials used when producing its products, Kellogg Company also has significant labor costs associated with the products. As of January 2, 2016, Kellogg Company had approximately 33,577 employees. A shortage in the labor pool, regulatory measures, and other pressures could increase the company’s labor cost, having a negative impact on the company’s operating income.

Requirements

1. Suppose Kellogg Company noticed an increase in its actual direct labor costs compared to the budgeted amount. How could Kellogg Company investigate this?

2. What is the direct labor cost variance and how would a company calculate this variance?

3. What is the direct labor efficiency variance and how would a company calculate this variance?

4. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor cost variance. What measures could Kellogg Company take to control this variance?

5. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor efficiency variance. What measures could Kellogg Company take to control this variance?

Short answer

1. Direct labor cost variance can be used toinvestigate the increase in the actual labor cost.

2. The variance determines the deviation in actual labor cost from the established labor cost.

3. The variance thatdepicts the efficiency of the laboris known as direct labor efficiency variance.

4. Direct labor cost variance cancontrol by reducing the per hour cost.

5. Direct labor efficiency variance can control by providing labor training to increase efficiency.

Step-by-step solution

Definition of Labor Cost

The expenditure done by the employer for its employee is known as labor cost. It comprises gross wages as well as the other contribution made by the employer.

Investigating increase in actual labor cost

Investigating the direct labor cost increase is to be done by calculating the direct labor cost variance.The increase in the actual cost of the labor might be due to the increase in the labor hours or might be due to an increase in the cost per labor.

Direct labor cost variance

A variance analysis that measures the difference between the actual cost incurred for labor and the standard cost established for labor is known as direct labor cost variance. It is calculated as:

$\mathit{D}\mathit{i}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{l}\mathit{a}\mathit{b}\mathit{o}\mathit{r}\mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathit{v}\mathit{a}\mathit{r}\mathit{i}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{=}\left(Actualcost-Standardcost\right)\mathbf{\times }\mathit{A}\mathit{c}\mathit{t}\mathit{u}\mathit{a}\mathit{l}\mathit{q}\mathit{u}\mathit{a}\mathit{n}\mathit{t}\mathit{i}\mathit{t}\mathit{y}$

Direct labor efficiency variance

Direct labor efficiency variance measures the difference between the actual labor hours used at standard cost and the standard cost of the direct labor. It determines the company’s efficiency in using its human resource or labor. It is calculated using the following formula:

$\mathit{D}\mathit{i}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{l}\mathit{a}\mathit{b}\mathit{o}\mathit{r}\mathit{e}\mathit{f}\mathit{f}\mathit{i}\mathit{c}\mathit{i}\mathit{e}\mathit{n}\mathit{c}\mathit{y}\mathit{v}\mathit{a}\mathit{r}\mathit{i}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{=}\left(Actualquantity-Standardquantity\right)\mathbf{\times }\mathit{S}\mathit{t}\mathit{a}\mathit{n}\mathit{d}\mathit{a}\mathit{r}\mathit{d}\mathit{c}\mathit{o}\mathit{s}\mathit{t}$

Step 5:Controlling direct labor cost variance

The total direct labor variance is unfavorable because of the direct labor cost variance. Therefore, the business entity can control this variance by reducing the cost incurred for each labor hour.

Controlling direct labor efficiency variance

The business entity can control the direct labor efficiency variance in the following ways:

1. Using the laborers efficiently can provide sufficient training to the laborers and get work done efficiently.

2. The business can also investigate whether the laborers are working for the same number of hours as mentioned in the time sheet. It might be possible that laborers indulge in fraudulent activities by mentioning excess time.