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.

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).

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 2. A higher-skilled laborer doing a lower-skilled task 3. Unexpected overtime Yes Yes Yes