Mastery Problem: Direct Labor Cost Variance

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

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	YesNoYes
2. A high turnover rate among skilled employees	YesNoYes
3. Using outdated time estimates in determining the standard rate for direct labor	YesNoYes

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For the direct labor rate variances, determine whether each item will impact the total price paid for the labor.

For direct labor time variances, determine whether each item will impact the quantity of hours used.

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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 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 $4,200,000, and the amount budgeted for those hours actually worked was $4,700,000, the actual cost for hours worked less the budgeted cost for hours worked is $fill in the blank 6a53dd0a2078001_1. This tells you that the actual cost at actual hours worked is

less thanequal togreater thanless than

the budgeted cost at actual hours worked.

What type of variance is this?

No varianceUnfavorable direct labor rate varianceFavorable direct labor rate varianceFavorable direct labor rate variance

If a company calculates that the budgeted cost for actual hours worked is $170,000, 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 $fill in the blank 6a53dd0a2078001_4. This tells you that the actual hours worked at budgeted cost is

equal togreater thanless thanequal to

budgeted hours worked at budgeted cost.

What type of variance is this?

Favorable direct labor time varianceUnfavorable direct labor time varianceNo VarianceNo Variance

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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 goesdown, then profits for the company goup, so a negative direct labor cost variance is favorable.

Likewise, an increase in the amount spent or hours used woulddecreaseprofits, so this would be an unfavorable variance.

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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.

Manufacturing Costs	Standard Price	x	Standard Hours per Pair	=	Standard Cost per Pair
Direct Labor	$fill in the blank 7abfee022070f8e_1 per hour		fill in the blank 7abfee022070f8e_2 hours		$fill in the blank 7abfee022070f8e_3

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Use the standard price and standard hours values shown to compute the standard labor cost per pair.

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Actual Direct Labor Cost During November, 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	$fill in the blank 1c5e1e053ffefdd_1		fill in the blank 1c5e1e053ffefdd_2 hours		$fill in the blank 1c5e1e053ffefdd_3

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Use the actual total cost of labor and actual hours used as shown to compute the actual labor cost per hour.

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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
fill in the blank 44e81700ef90066_1	x	$fill in the blank 44e81700ef90066_2		fill in the blank 44e81700ef90066_3	x	$fill in the blank 44e81700ef90066_4		fill in the blank 44e81700ef90066_5	x	$fill in the blank 44e81700ef90066_6
	=	$fill in the blank 44e81700ef90066_7			=	$fill in the blank 44e81700ef90066_8			=	$fill in the blank 44e81700ef90066_9
	Direct Labor Rate Variance	Direct Labor Time Variance
		$fill in the blank 44e81700ef90066_10	-	$fill in the blank 44e81700ef90066_11		$fill in the blank 44e81700ef90066_12	-	$fill in the blank 44e81700ef90066_13
			=	$fill in the blank 44e81700ef90066_14	UFNo varianceU	=	$fill in the blank 44e81700ef90066_16	UFNo varianceU
				Total Labor Cost Variance
				$fill in the blank 44e81700ef90066_18	-	$fill in the blank 44e81700ef90066_19
					=	$fill in the blank 44e81700ef90066_20	UFNo varianceU