Direct Labor Wage and Efficiency Variances

Two basic ways in which the actual cost of direct labor can deviate from standard cost is through: (1) wage rate or (2) the number of hours used in production. Therefore, the labor rate variance and the labor efficiency variance are typically calculated in determining whether or not the cost of direct labor is as expected or not. When standard costing is used in this way it is used for - Select your answer -planningcontroldecision makingItem 1 .

The labor rate variance compares the actual price paid per unit of direct materials to the standard price. The difference is then multiplied by the actual hours worked in production.

Labor rate variance = (Actual rate Actual hours) - (Standard rate Actual hours)

or

Labor rate variance = Actual hours (Actual rate - Standard rate)

Unlike materials, labor cannot be inventoried. So actual hours are measured as hours worked in production.

For example, Filmont Company has the following standard cost card for prime costs:

Direct materials (2 yards @ $1.65 per yard)	$ 3.30
Direct labor (1.15 hours @ $20 per hour)	23.00

Last month, Filmont produced 420 units. Actual cost for direct labor was $9,507.30 for 473 direct labor hours worked.

Standard hours for actual quantity equaled hours.

Then,

Labor rate variance = $9,507.30 - (473 $20) = $9,507.30 - $9,460 = $47.30 Unfavorable

or

Labor rate variance = 473($20.10 - $20.00) = $47.30 Unfavorable

Notice that the second equation makes it easier to compare the actual wage of $20.10 per hour ($9,507.30/473 hours) with the standard wage of $20 per hour. Clearly, Filmont Company has paid $0.10 per hour more than standard. Multiplied by 473 actual hours worked the variance between actual wage and standard wage expected is $47.30.

Suppose that Filmont had paid $9,251.90 for 473 hours. The labor rate variance would be (Do not round intermediate calcuations. Round your answer to the nearest cent.) $- Select your answer -favorableunfavorableItem 4 .

The labor efficiency variance compares the direct labor hours actually worked with the standard direct labor hours that should have been worked for actual production. The standard amount is based on the number of units actually produced and the unit direct labor standard.

Labor efficiency variance = (Actual hours Standard rate) - (Standard hours Standard rate)

or

Labor efficiency variance = Standard rate (Actual hours - Standard hours)

Standard hours = Actual units produced unit standard direct labor hours

Recall that Filmont Company has the following standard cost card for prime costs:

Direct materials (2 yards @ $1.65 per yard)	$ 3.30
Direct labor (1.15 hours @ $20 per hour)	23.00

Last month, Filmont produced 420 units and had 473 hours of direct labor.

What is the number of direct labor hours at standard for last month? hours

Then the labor efficiency variance = $ ( - 473) = $ Favorable

The labor efficiency variance is favorable because fewer hours were worked than the standard (420 units 1.15 hours per unit) for actual units produced.

Suppose 503 hours had been worked. The labor efficiency variance would have been $ - Select your answer -favorableunfavorableItem 10 .