Chapter 23, Problem 16E

1.

To determine

Compute the direct labor rate variances, direct labor efficiency variances and the

Total direct labor cost variances for October and November month.

Explanation of Solution

Direct Labor Rate Variance

The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor.

The following formula is used to calculate the direct labor rate variance:

$\text{Direct labor rate variance = }\left[\begin{array}{l}\left(\text{Actual Hours}\times \text{Actual Rate}\right)-\\ \left(\text{Actual Hours}\times \text{Standard Rate}\right)\end{array}\right]$

Compute the direct labor rate variances for October:

$\begin{array}{c}\text{Direct labor rate variance = }\left[\begin{array}{l}\left(\text{Actual Hours}\times \text{Actual Rate}\right)-\\ \left(\text{Actual Hours}\times \text{Standard Rate}\right)\end{array}\right]\\ \text{ = }\left[\begin{array}{l}\left(\text{16,250 hours}\times \text{\$15}\text{.20 per hour}\right)-\\ \left(\text{16,250 hours}\times \text{\$15}\text{.00 per hour}\right)\end{array}\right]\\ =\left[\$247,0000-\$243,750\right]\\ =\$3,250\text{ U}\end{array}$

Working note:

Calculate the actual rate per hour:

$\begin{array}{c}\text{Actual rate per hour = }\left(\frac{\text{Total amount of direct labor for October }}{\text{Direct labor hours used during October}}\right)\\ \text{= }\left(\frac{\$247,000}{16,250\text{ hours}}\right)\\ \text{=\$15}\text{.20 per hour}\end{array}$

Direct labor efficiency variance is a measure that determines the difference between the estimated labor quantity and the actual labor quantity used.

$\begin{array}{l}\text{Direct labor }\\ \text{efficiency variance}\end{array}\}=\left[\begin{array}{l}\left(\text{Standard Hours}\times \text{Standard Rate}\right)-\\ \left(\text{Actual Hours}\times \text{Standard Rate}\right)\end{array}\right]$

Compute the direct labor efficiency variance for October:

$\begin{array}{c}\text{Direct labor efficiency variance = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual hours used}\\ \times \text{Standard rate per hour}\end{array}\right)-\\ \left(\begin{array}{l}\text{Standard hours used}\\ \times \text{Standard rate per hour}\end{array}\right)\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left(\text{16,250 hours}\times \text{\$15 per hour}\right)-\\ \left(\text{16,800 hours}\times \text{\$15 per hour}\right)\end{array}\right]\\ =\left[\$243,750-\$252,000\right]\\ =\$8,250\left(\text{favorable}\right)\end{array}$

Working note:

Calculate the standard hours used:

$\begin{array}{c}\text{Standard hours used = }\left(\begin{array}{l}\text{Number of units produced}\times \\ \text{Standard hours per unit}\end{array}\right)\\ \text{= 5,600 units}\times 3\text{ hours per unit}\\ \text{=16,800}\end{array}$

Direct labor variance:

The direct labor variance refers to the variation in the actual amount paid for labor and the amount that should have been paid. The total labor variance is the sum of labor price variance and the labor quantity variance.

Direct labor cost variance is a measure that determines the difference between the estimated cost of the direct labor and the actual cost of the direct labor.

Total direct labor cost variances for October month:

$\begin{array}{c}\text{Total direct labor cost variances}\text{=}\left[\begin{array}{l}\text{Direct labor rate variance}\left(\text{unfavorable}\right)\\ -\text{Direct labor efficiency variance}\left(\text{favorable}\right)\end{array}\right]\\ \text{=}\left[\$3,250\text{U}-\$8,250\text{ F}\right]\\ \text{=\$5,000 F}\end{array}$

Compute the direct labor rate variances for November:

$\begin{array}{c}\text{Direct labor rate variance = }\left[\begin{array}{l}\left(\text{Actual Hours}\times \text{Actual Rate}\right)-\\ \left(\text{Actual Hours}\times \text{Standard Rate}\right)\end{array}\right]\\ \text{ = }\left[\begin{array}{l}\left(\text{22,000 hours}\times \text{\$15}\text{.25 per hour}\right)-\\ \left(\text{22,000 hours}\times \text{\$15}\text{.00 per hour}\right)\end{array}\right]\\ =\left[\$335,500-\$330,000\right]\\ =\$5,500\text{ U}\end{array}$

Working note:

Calculate the actual rate per hour:

$\begin{array}{c}\text{Actual rate per hour = }\left(\frac{\text{Total amount of direct labor for November }}{\text{Direct labor hours used during November}}\right)\\ \text{= }\left(\frac{\$335,000}{22,000\text{ hours}}\right)\\ \text{=\$15}\text{.25 per hour}\end{array}$

Compute the direct labor efficiency variance for November:

$\begin{array}{c}\text{Direct labor efficiency variance = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual hours used}\\ \times \text{Standard rate per hour}\end{array}\right)-\\ \left(\begin{array}{l}\text{Standard hours used}\\ \times \text{Standard rate per hour}\end{array}\right)\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left(\text{22,000 hours}\times \text{\$15 per hour}\right)-\\ \left(\text{18,000 hours}\times \text{\$15 per hour}\right)\end{array}\right]\\ =\left[\$330,000-\$270,000\right]\\ =\$60,000\left(\text{unfavorable}\right)\end{array}$

Working note:

Calculate the standard hours used:

$\begin{array}{c}\text{Standard hours used = }\left(\begin{array}{l}\text{Number of units produced}\times \\ \text{Standard hours per unit}\end{array}\right)\\ \text{= 6,000 units}\times 3\text{ hours per unit}\\ \text{=18,000}\end{array}$

Total direct labor cost variances for November month:

$\begin{array}{c}\text{Total direct labor cost variances}\text{=}\left[\begin{array}{l}\text{Direct labor rate variance}\left(\text{unfavorable}\right)\\ +\text{Direct labor efficiency variance}\left(\text{unfavorable}\right)\end{array}\right]\\ \text{=}\left[\$5,500\text{U + }\$60,000\text{ U}\right]\\ \text{=\$65,500 U}\end{array}$

Conclusion

Hence, the direct labor rate variance is $3,250 (unfavorable), direct labor efficiency variance is $8,250 (favorable) and total direct labor cost variances for October month is $5,000 F.

Hence, the direct labor rate variance is $8,250 (unfavorable), direct labor efficiency variance is $60,000 (unfavorable) and total direct labor cost variances for November month is $65,500 U.

2.

To determine

Interpret the October direct labor variances.

Explanation of Solution

Unfavorable Variance caused when the actual costs are more and the standard costs are less. Favorable Variance caused when the actual costs are less than the standard cost.

The direct labor rate variance for the month of October is $3,250 (unfavorable) indicates that actual rate for an hour is higher than budgeted cost.

The direct labor efficiency variance for the month of October is $8,250 (favorable) indicates that actual hour used is less than budgeted cost.

These two variance result indicates that employees are paid more than the budgeted costs. Also, those employees are engaged in more productive than budgeted. During October, effective labors were used. In November month, there was an unfavorable rate variance and unfavorable efficiency variance.