Chapter 23, Problem 11QS

To determine

Introduction:

Variance Analysis

• Variances are the difference between the budgeted values and actual values of the cost and revenue items and are analyzed for components of direct and indirect costs.

• In case of costs, the change is deemed unfavorable if the actual costs exceed the budgeted costs and the change is deemed favorable if the actual costs do not exceed the budgeted costs.

• In case of revenues, the change is deemed favorable if the actual revenues exceed the budgeted revenues and the change is deemed unfavorable if the actual revenues are less than the budgeted revenues. Examples of the Variance Analysis metrics include:

• Direct Labor Rate Variance − It is a measure of the actual labor rate paid for goods produced against budgeted rates and estimated labor cost that will be paid.

• A favorable variance indicates lower costs as well as greater profitability and an unfavorable variance indicates reduced revenues and has an adverse impact on profitability.

  $\text{Labor Rate Variance = ( Actual Rate - Budgeted Rate ) x Actual Hours}$

• Direct Labor Efficiency Variance − It is a measure of the actual labor efficiency for goods produced against budgeted estimated labor cost that will be used for goods manufactured

• A favorable variance indicates lower costs as well as greater profitability and an unfavorable variance indicates reduced revenues and has an adverse impact on profitability.

  $\text{Labor Efficiency Variance = ( Actual Hours - Budgeted Hours ) x Standard Rate}$

To Determine:

Direct Labor Rate Variance and Direct Labor Efficiency Variance.