Chapter 13, Problem 13.6.5P

To determine

Concept Introduction:

Direct labor variances:

Direct labor variances refer to the difference between the standard direct labor cost and actual direct labor cost incurred. Direct labor cost variances are categorized into following categories:

1. Direct labor Rate variance: this variance shows the difference of standard rate and actual rate of labor. The formula to calculate this variance is as follows:

  $\text{Direct labor rate variance = }\left(\text{Actual rate – Standard rate}\right)\times \text{Actual hours}$

2. Direct labor efficiency variance: this variance shows the difference of standard usage and actual usage of labor. The formula to calculate this variance is as follows:

  $\text{Direct labor efficiency variance = }\left(\text{Actual hours – Standard hours}\right)\times \text{Standard rate}$

3. Direct labor cost variance: this variance shows the difference of standard cost and actual cost of labor. The formula to calculate this variance is as follows:

  $\text{Direct labor cost variance = Direct labor rate variance + Direct labor efficiency variance}$

Or

Direct Labor cost variance = Actual Labor cost − Standard Labor Cost

To Indicate:

The Decision for the selection of type of labor payment