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Mastery Problem: Direct Labor Cost Variance

Direct Labor Cost Variance Analysis

Direct labor cost variance analysis is used primarily as a performance evaluation measure for responsible managers in a segment of a business. Direct labor cost 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 cost 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 cost 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 direct 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.

Direct Labor Rate Variance

This type of variance is concerned with the difference between what was paid for labor and whatshould have been paid forlabor for the actual production achieved.

Which of the following activities are possible causes of direct labor rate variance? Select "Yes" for all that apply.

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. Yes

Direct Labor Time Variance

This type of variance is concerned with the difference between the labor hours that were actually used and the labor hours thatshould have been used.

Which of the following activities are possible causes of direct labor time variance? Select "Yes" for all that apply.

1. A higher-than-normal defect level resulting in unplanned additional work. Yes

2. A high turnover rate among skilled employees. Yes

3. Using outdated time estimates in determining the standard rate for direct labor. Yes

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 termsfavorableandunfavorableare 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 $4,900,000, and the amount budgeted for those hours actually worked was $4,200,000, the actual cost for hours worked less the budgeted cost for hours worked is $ 700,000. This tells you that the actual cost at actual hours worked isgreater thanthe budgeted cost at actual hours worked.

What type of variance is this? Unfavorable direct labor rate variance

If a company calculates that the budgeted cost for actual hours worked is $160,000, and the budgeted cost at the budgeted amount of hours to have been worked is $160,000, the budgeted cost at actual time worked less the budgeted cost at budgeted hours to have been worked is $0.

This tells you that the actual hours worked at budgeted cost isequal tobudgeted hours worked at budgeted cost.

What type of variance is this? No Variance

Standard Direct Labor Cost

The controller at your shoemaking company has determined that under normal conditions, you pay your employees $8.50 per hour, and it will take 2.8 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.

Manufact. Costs Standard Price x Standard Hrs per Pair =Standard Cost per Pair

Direct Labor $8.50 per hr 2.8hrs $23.8

Actual Direct Labor Cost

During December, your shoe-making company incurred actual direct labor costs of $65,610 for 7,290 hours of direct labor in the production of 2,200 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.

Manufacturing Costs Actual Total Cost/Actual Total Hours=Actual Cost per Hour

Direct Labor $65,610 $7,290hrs $9

APPLY THE CONCEPTS: Conduct the direct labor cost variance analysis

Illustrated Example: Calculating Direct Labor Cost Variance

Complete the following graphic to compute the direct labor rate variance, the direct labor time variance, and the total direct labor cost variance for your shoe-making business. When required, enter the rates as dollars and cents. If required, use the minus sign to indicate a negative value.

Actual Cost Standard Cost

Actual Hours x Actual RateActual Hours x Standard RateStandard Hours x Standard Rate

Actual Hours X Actual Rate Actual Hours X Standard Rate Standard Hours X Standard Rate 7,290 V 9 7,290 X 8.50 X X 8.50 65,610 61,965 202.3 X Direct Labor Rate Variance Direct Labor Time Variance 65,610 V 61,965 V 61,965 $ UV 3,645 UV Total Labor Cost Variance $ 65,610 UV