Chapter 21, Problem 16E

(1)

To determine

To compute: Direct Labor Rate, Efficiency and Total Direct Labor Cost variance

Explanation of Solution

Direct Labor Rate

Formula to calculate Direct Labor Rate Variance,

$\text{Direct}\text{Labor}\text{Rate}\text{Variance}=(\text{Standard}\text{Rate}-\text{Actual}\text{Rate})\times \text{Actual}\text{Hour}$

Direct Labor Rate Variance for October

Substitute $15 for standard rate, $15.2 for actual rate. and 16,250 for actual hours.


$\begin{array}{c}\text{Direct}\text{Labor}\text{Rate}\text{Variance}=(15-15.2)\times 16,250\\ =\$3,250\text{unfavorable}\end{array}$

Direct Labor Rate Variance for November

Substitute $15 for standard rate, $15.25 for actual rate. and 22,000 for actual hours.

$\begin{array}{c}\text{Direct}\text{Labor}\text{Rate}\text{Variance}=(15-15.25)\times 22,000\\ =\$5,500\text{unfavorable}\end{array}$

Direct Labor Efficiency Variance

Formula to calculate Direct Labor Efficiency Variance,

$\text{Direct}\text{Labor}\text{Efficiency}\text{Variance}=\left[\begin{array}{l}(\text{Standard}\text{Hour}-\text{Actual}\text{Hour})\\ \times \text{Standard}\text{Rate}\text{Per}\text{Hour}\end{array}\right]$

Direct Labor Efficiency Variance for October

Substitute 16,800 for standard hour, 16,250 for actual hour. and $15 for standard rate per hour.

$\begin{array}{c}\text{Direct}\text{Labor}\text{Efficiency}\text{Variance}=(16,800-16,250)\times 15\\ =\$8250\text{favorable}\end{array}$

Direct Labor Efficiency Variance for November

Substitute 18,000 for standard hour, 22,000 for actual hour. and $15 for standard rate per hour.

$\begin{array}{c}\text{Direct}\text{Labor}\text{Efficiency}\text{Variance}=(18,000-22,000)\times 15\\ =\$60,000\text{unfavorable}\end{array}$

Direct Labor Cost Variance

Formula to calculate Direct Labor Cost Variance,
$\text{Direct}\text{Labor}\text{Cost}\text{Variance}=\left[\begin{array}{l}(\text{Actual}\text{Hour}\times \text{Actual}\text{Rate})\\ -(\text{Standard}\text{Hour}\times \text{Standard}\text{Rate)}\end{array}\right]$

Direct Labor Cost Variance for October.

Substitute 16,250 for actual hour, 15.20 for actual rate, 16,800 for standard hour. and $15 for standard rate per hour.

$\begin{array}{c}\text{Direct}\text{Labor}\text{Cost}\text{Variance}=(16,250\times 15.20)-(16,800\times 15)\\ =\$5,000\text{favorable}\end{array}$

Direct Labor Cost Variance for November

Substitute 22,000 for actual hour, 15.25 for actual rate, 18,000 for standard hour. and $15 for standard rate per hour.

$\begin{array}{c}\text{Direct}\text{Labor}\text{Cost}\text{Variance}=(22,000\times 15.25)-(18,000\times 15)\\ =\$65,500\text{unfavorable}\end{array}$

Thus, Direct Labor Rate Variance for October is $3250 unfavorable and for November is $5,500 unfavorable. Direct Labor Efficiency Variance for October is $8,250 favorable. and for November is $60,000 unfavorable and Direct Labor Cost Variance for October is $5,000 favorable. and for November is $65,500 unfavorable

Working note:

Calculation of Actual labor rate per hour,
$\begin{array}{c}\text{Actual}\text{labor}\text{rate}\text{per}\text{hour}\text{for}\text{October}=\frac{\text{Total}\text{cost}\text{paid}\text{to}\text{labor}}{\text{Number}\text{of}\text{hours}\text{labor}\text{actually}\text{worked}}\\ =\frac{\$247,000}{16,250}\\ =\$15.2\end{array}$

$\begin{array}{c}\text{Actual}\text{labor}\text{rate}\text{per}\text{hour}\text{for}\text{November}=\frac{\text{Total}\text{cost}\text{paid}\text{to}\text{labor}}{\text{Number}\text{of}\text{hours}\text{labor}\text{actually}\text{worked}}\\ =\frac{\$335,500}{22,000}\\ =\$15.25\end{array}$

Calculation of standard direct labor hours,
$\begin{array}{c}\text{Standard}\text{direct}\text{labor}\text{hours}\text{for}\text{October}=\left(\begin{array}{l}\text{Number}\text{of}\text{units}\text{actually}\text{produced}\\ \times \text{Standard}\text{labor}\text{hour}\text{in}\text{each}\text{unit}\end{array}\right)\\ =5,600\times 3\\ \text{=16,800}\text{labor}\text{hours}\end{array}$

$\begin{array}{c}\text{Standard}\text{direct}\text{labor}\text{hours}\text{for}\text{November}=\left(\begin{array}{l}\text{Number}\text{of}\text{units}\text{actually}\text{produced}\\ \times \text{Standard}\text{labor}\text{hour}\text{in}\text{each}\text{unit}\end{array}\right)\\ =6,000\times 3\\ \text{=18,000}\text{labor}\text{hours}\end{array}$

(2)

To determine

To interpret: October direct labor variances.

Explanation of Solution

In the month of October,

There is an unfavorable labor rate variance amounting $ 3,250 because standard rate of labor was $ 15 per hour whereas actual labor rate was $15.2 per hour which resulted in excess cost to company.

There is a favorable labor efficiency variance amounting $ 8,250 because standard hours of labor required to produce 5600 units is 16800 hours whereas actual labor hours were 16,250 which resulted in cost saving to company

Total labor cost variance amounts $5,000 favorable because favorable labor efficiency variance is more than unfavorable labor rate variance.

Thus, there is a total benefit of $5000 to company in October.