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 what should have been paid for labor 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 that should 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 Using outdated time estimates in determining the standard rate for direct labor	Yes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 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 $4,000,000, 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 the budgeted cost at actual hours worked.

What type of variance is this?

If a company calculates that the budgeted cost for actual hours worked is $100,000, and the budgeted cost at the budgeted amount of hours to have been worked is $170,000, 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 budgeted hours worked at budgeted cost.

What type of variance is this?

Standard Direct Labor Cost The controller at your shoemaking company has determined that under normal conditions, you pay your employees $8.30 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.

Manufacturing Costs	Standard Price	x	Standard Hours per Pair	=	Standard Cost per Pair
Direct Labor	$ per hour		hours		$

Actual Direct Labor Cost During June, your shoe-making company incurred actual direct labor costs of $58,872 for 6,690 hours of direct labor in the production of 2,150 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	$		hours		$

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 Rate		Actual Hours	x	Standard Rate		Standard Hours	x	Standard Rate
	x	$			x	$			x	$
	=	$			=	$			=	$
	Direct Labor Rate Variance					Direct Labor Time Variance
		$	-	$		$	-	$
			=	$			=	$
				Total Labor Cost Variance
				$	-	$
					=	$