Calista & Lane, CPAs set the following standard for its inventory audit of Trium

Question

Calista & Lane, CPAs set the following standard for its inventory audit of Triumph Co;: 350 hours at an average hourly billing rate of $ 250. The firm actually worked 330 hours during the inventory audit process. The total labor variances for the audit was $ 3,500 unfavorable.

a. Compute the total actual payroll.

b. Compute the labor efficiency variance.

c. Compute the labor rate variance.

d. Prepare the entry to assign labor costs to inventory, record the labor variances, and accuse payroll costs.

Explanation / Answer

Direct Labor Rate Variance (DLRV) Formula: [Labor rate variance = (Actual hours worked × Actual rate) - (Actual hours worked × Standard rate)] ie DLRV = (330*Actual Rate) - (330*$250) = 3500U = 3500 ie 330*Act Rate = 3500+82500 = 86000 ie Actual Rate = 86000/330 = $260.61 So Actual Payoll = Actual Hrs * Act Rate = 330*$260.61 = $86,001.30 ..............(A) Formula of labor efficiency variance (LEV) : [Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate)] ie LEV = (330*250)-(350*250) = $82,500-$87,500 = 5000F................(B) mmddyy Factory Labor Dr 82,500 Direct Labor Rate Variance Dr 3500 Wages Payable Cr 86,000 Record Direct Labor rate variance mmddyy Work-in-Process Inventory Dr 87500 Direct Labor Efficiency Variance Cr 5000 Factory Labor Cr 82500 Assign Direct Labor eff var to Work-in Process Inventory...........(D) Memo: When the actual rate is more than the standard rate an unfavorable labor rate variance results. Rates paid to the workers are usually predictable. Nevertheless, rate variances can arise through the way labor is used. Skill workers with high hourly rates of pay may be given duties that require little skill and call for low hourly rates of pay. This will result in an unfavorable labor rate variance, since the actual hourly rate of pay will exceed the standard rate specified for the particular task. In contrast, a favorable rate variance would result when workers who are paid at a rate lower than specified in the standard are assigned to the task. However, the low pay rate workers may not be as efficient. Finally, overtime work at premium rates can be reason of an unfavorable labor price variance if the overtime premium is charged to the labor account. So Who is responsible for the labor rate variance? Since rate variances generally arise as a result of how labor is used, production supervisors bear responsibility for seeing that labor price variances are kept under control. A favorable labor efficiency variance occurs when actual processing time is less than the time allowed by standards. So Who is Responsible for Labor Efficiency Variance? The manager in charge of production is generally considered responsible for labor efficiency variance. However, purchase manager could be held responsible if the acquisition of poor materials resulted in excessive labor processing time. Possible causes / reasons of an unfavorable efficiency variance include poorly trained workers, poor quality materials, faulty equipment, and poor supervision. Another important cause / reason of an unfavorable labor efficiency variance may be insufficient demand for company's products. If customers orders are insufficient to keep the workers busy, the work center manager has two options, either accept an unfavorable labor efficiency variance or build up inventories. The second option is opposite to the basic principle of just in time (JIT). Inventories with no immediate prospect of sale is a bad idea according to just in time approach. Inventories, particularly work in process inventory leads to high defect rate, obsolete goods, and generally inefficient operations. As a consequence, when the work force is basically fixed in the short term, managers must be cautious about how labor efficiency variances are used. Some managers advocate dispensing with labor efficiency variance entirely in such situations?at least for the purpose of motivating and controlling workers on the shop floor.

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