Direct Labor Variances The following data relate to labor cost for production of

Question

Direct Labor Variances

The following data relate to labor cost for production of 6,800 cellular telephones:

a. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

b. The employees may have been less-experienced or poorly trained, thereby resulting in a lower labor rate than planned. The lower level of experience or training may have resulted in less efficient performance. Thus, the actual time required was more than standard.

Explanation / Answer

Actual Hours worked= 4,600 hrs.

Actual Rate per Hour = $14.4

Standard Hours worked =          4,530 hrs. at

Standard Rate per Hour =$14.6

We have three costs:

Direct Labor Rate Variance

= Actual cost incurred - Actual Hours of Input, at the Standard Rate

= (Actual Rate per Hour * Actual Hours) – (Standard Rate per Hour × Actual Hours)

= (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours

= ($14.4 – $14.6) × 4600 hrs

= - 920

Favorable (actual cost incurred I paid is less than what I would have paid at standard rate)

Labor time variance

= (Actual hours worked -Standard hours allowed) × Standard rate

= (Actual hours worked × Standard rate)-(Standard hours allowed× Standard rate)

= (4600-4530)*14.6

=1022

Unfavorable

The actual hours I have put in (at standard rate) is more than the budgeted amount

Total direct labor cost variance:

= Direct Labor Rate Variance + Direct Labor time variance

=1022 (unfavorable) + -920 (favorable)

=102

Here unfavorable variance is greater than favorable. Hence the variance is taken as unfavorable

Another method for easy understanding

Total direct labor cost variance:

= Actual cost -Standard cost

= Actual cost incurred - Standard cost /budgeted cost

= (AH × AR) - (SH × SR) =

= 66240-66138

=102

Actual cost incurred is greater than budgeted cost. Variance unfavorable

b.Actual labor rate per hour is lower than budgeted one resulting in rate variance

Employees may have less-experienced or poor training. so their efficiency is low resulting in time variance or effcefficiencyaiance

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