Blueprint Problem: Direct labor variance Labor Variance Analysis Labor variance
ID: 2467229 • Letter: B
Question
Blueprint Problem: Direct labor variance
Labor Variance Analysis
Labor variance analysis is used primarily as a performance evaluation measure for responsible managers in a segment of a business. Labor variance occurs when the cost of labor or the amount of labor used deviates from what was budgeted by company management during initial planning, for either a given period of time or for a specific amount of production. Direct labor variance analysis is conducted by comparing the standard direct labor rate for production with the actual direct labor rate incurred for the production of the product.
There are two parts to direct labor variance analysis. The first is a comparison of the standard rate per unit of labor with the actual rate per unit of labor, which results in the determination of the labor rate variance. The second is a comparison of the standard quantity of use of units of labor with the actual quantity of use of units of labor for the actual production achieved, which results in the determination of the labor efficiency (usage) variance.
Labor Rate Variance
This type of variance is concerned with the difference between what was paid for labor and what should have been paid for labor for the actual production achieved.
Which of the following activities are possible causes of labor rate variance? Select "Yes" for all that apply.
Labor Efficiency Variance
This type of variance is concerned with the difference between the labor hours that were actually used and the labor hours that should have been used.
Which of the following activities are possible causes of labor rate variance? Select "Yes" for all that apply.
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Gauging the Favorableness of Variances
When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.
Note: Use the minus sign to indicate negative values (when the budgeted amount is greater than the actual).
If a company calculates that the actual cost for the actual hours worked by employees was $4,400,000, and the amount budgeted for those hours actually worked was $3,300,000, the actual cost for hours worked less the budgeted cost for hours worked is $ . This tells you that the actual cost at actual hours worked is selectgreater thanless thanequal toCorrect 2 of Item 2 the budgeted cost at actual hours worked.
What type of variance is this?
SelectFavorable rate varianceNo varianceUnfavorable rate varianceCorrect 3 of Item 2
If a company calculates that the budgeted cost for actual hours worked is $130,000, and the budgeted cost at the budgeted amount of hours to have been worked is $100,000, the budgeted cost at actual time worked less the budgeted cost at budgeted hours to have been worked is $ . This tells you that the actual hours worked at budgeted cost is selectgreater thanless thanequal toCorrect 5 of Item 2
What type of variance is this?
SelectNo varianceFavorable efficiency varianceUnfavorable efficiency varianceCorrect 6 of Item 2
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Partially Correct
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Subtract the budgeted amount from the actual amount to get the sign correct. Note that if an amount spent or hours used for labor goes down, then profits for the company goup, so a negative labor variance is favorable.
Likewise, an increase in the amount spent or hours used would decrease profits, so this would be an unfavorable variance.
Standard Direct Labor Cost
The controller at your shoemaking company has determined that under normal conditions, you will pay your employees $8.40 per hour, and it will take 2.6 hours of labor per pair of shoes. Given this information, calculate the standard cost of labor per pair of shoes. If required, round the standard labor per pair of shoes to the nearest cent.
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Actual Direct Labor Cost
During July, your shoe-making company incurred actual direct labor costs of $62,211 for 6,990 hours of direct labor in the production of 2,175 pairs of shoes. Given this information, calculate the actual cost of labor per hour. If required, round the actual cost of labor per hour to the nearest cent.
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APPLY THE CONCEPTS: Conduct the labor variance analysis
Illustrated Example: Calculating Labor Price and Usage Variance
Complete the following graphic to compute the direct labor rate variance, the direct labor efficiency variance, and the total labor cost variance for the production of shoes (in terms of pairs). When required, enter the rates as dollars and cents. If required, use the minus sign to indicate a negative value.
1. A lower-skilled laborer doing a higher-skilled task selectYesNoCorrect 1 of Item 1 2. A higher-skilled laborer doing a lower-skilled task selectYesNoCorrect 2 of Item 1 3. Unexpected overtime selectYesNoCorrect 3 of Item 1Explanation / Answer
1. Labor Rate Variance
2. Labor Efficiency Variance
3. Gauging the Favorableness of Variances
If a company calculates that the actual cost for the actual hours worked by employees was $4,400,000, and the amount budgeted for those hours actually worked was $3,300,000, the actual cost for hours worked less the budgeted cost for hours worked is $ 1,100,000 Unfeavorable
If a company calculates that the budgeted cost for actual hours worked is $130,000, and the budgeted cost at the budgeted amount of hours to have been worked is $100,000, the budgeted cost at actual time worked less the budgeted cost at budgeted hours to have been worked is $ 30,000 Feavorable
4. Standard Direct Labor Cost
Standard Cost per Pair = $8.40 (Standard Price) * 2.6 (Standard Hours per Pair) = $21.84
5. Actual Direct Labor Cost
Actual Cost per Hour = $62,211 (Actual Total Cost) / 6990 (Actual Total Hours) = $8.9
1. A lower-skilled laborer doing a higher-skilled task Yes 2. A higher-skilled laborer doing a lower-skilled task Yes 3. Unexpected overtime No