Masteryr 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 ofthe product. There are two parts to direct labor cost variance analysis. The rst 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 oflabor 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 beer 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 lowerskilled laborer doing a higherskilled task L V" 2. A higher-skilled laborer doing a lowerskilled task k V" 3. Unexpected overtime L '5' 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 k V" 2. A high turnover rate among skilled employees k w" 3. Using outdated time estimates in determining the standard rate for direct labor k NI" Feedback " Check My Work For the direct labor rate varianoes. determine whether each item will impact the total pn'ce paid for the labor. For direct labor time variances. detem'line whether each item will impact the quantity of hours used. Gauging the Favorableness of Variances when variances occurr 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 $5,000,000, and the amount budgeted for those hours actually worked was $5,000,000, the actual cost for hours worked less the budgeted cost for hours worked is on of . This tells you that the actual cost at actual hours worked is Egul to 'r J the budgeted cost at actual hours worked. What type of variance is this? No variance 1' 1.! Ifa company calculates that the budgeted cost for actual hours worked is $150,000, and the budgeted cost at the budgeted amount of hours to have been worked is $200,000, the budgeted cost at actual time worked less the budgeted cost at budgeted hours to have been worked is 5 50,000 'v' . This tells you that the actual hours worked at budgeted cost is less than v v" budgeted hours worked at budgeted cost. What type of variance is this? Favorable direct labor time variance v if Feedback " Check My Work Subtract the budgeted amount from the actual amountto get the sign correct. Note that if an amount spent or hours used for labor goes down. then profits for the company go gp. so a negative direct labor cost variance is favorable. Likewise, an increase in the amount spent or hours used would decrease prots. so this would be an unfavorable variance. Standard Direct Labor Cost The controller at your shoemaking company has determined that under normal conditions, you pay your employees $8.60 per hour, and it will take 2.8 hours of labor per pair of shoes. lGiven 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 3: Standard Hours per Pair = Standard Cost per Pair Direct Labor '_ if per hour 3'" hours '. 24.08 4 Feedback ' Check My Work Use the standard price and standard hours values shown to compute the standard labor cost per pair. Actual Direct Labor Cost During July, your shoemaking company incurred actual direct labor costs of $69,060 for 1590 hours of direct labor in the production of 2,225 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 1 Actual Total Hours = Actual Cost per Hour Direct Labor -.- 69.069 J 32590 4' hours 5- J Feedback "' Check My Work Use the actual total cost of labor and actual hours used as shown to compute the actual labor cost per hour. 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. 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 Direct Labor Rate Variance Direct Labor Time Variance $ $ U U V Total Labor Cost Variance U V Feedback Check My Work Pull down each of the values from the sections above and track the values down following the arrows. To determine standard labor hours used, multiply the number of shoes actually completed times the standard quantity of hours that should be used per shoe. Feedback Check My Work Partially correct