Chapter 9, Problem 7.2GBP

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 or spending 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 Journal entry for Direct labor Cost and related variances.