Chapter 23, Problem 16E

To determine

Direct Labor Rate Variance:

The difference between the actual rate per direct labor hour and standard rate per direct labor hours at the actual labor hour is called the direct labor rate variance. It measures the variance due the changes in the rate of direct labor hour.

Direct Labor Efficiency Variance:

The variance which is caused by the difference between the actual labor hours and standard labor hours allowed per unit is called the direct labor efficiency variance. It is computed by deducting the standard cost of direct labor from the standard cost at actual direct labor hour.

Direct Labor Cost Variance:

The variance between the actual labor cost incurred and the budgeted labor cost is termed as direct labor cost variance. It can be computed by deducting the budgeted labor cost from the actual cost. On the contrary, it can also be ascertained by adding the direct labor rate variance and direct labor efficiency variance.

To determine:

1. Computation of direct labor rate, efficiency, cost variance for the month October and November.

2. Interpret the variances.

Answer to Problem 16E

Solution:

1.

Direct Labor	October	November
Rate Variance	$3,250 U	$5,500 U
Efficiency Variance	$8,250 F	$60,000 U
Cost Variance	$5,000 F	$65,500 U

2. Interpretation:

Direct Labor Rate Variance:

The unfavorable variance of $3,250 in October is caused by the difference between the actual rate per hour with $15.20 and the standard rate per hour with $15.00. When the actual labor hours increases to 22,000 hours and the actual rate increases to $15.25, the difference of $0.25 per labor rate results in unfavorable variance of $5,500.

Direct Labor Efficiency Variance:

In the October month, Null Company had favorable direct labor efficiency variance of $ 8,250 because the actual labor hour (16,250) was less than the standard labor hours (16,800) estimated for the month. But in the month of November, the company had unfavorable variance of $60,000 in direct labor efficiency because of the actual labor hour (22,000) was more than the standard labor hour (18,000) estimated.

Direct Labor Cost Variance:

The company had favorable direct cost variance of $5,000 in the month of October due to budgeted direct labor cost more than the actual labor cost incurred. But when the units of production increases in November, due significant high increase in the actual direct labor hours compare to increase in unit produced, the company has an unfavorable variance of $65,500.

Explanation of Solution

Explanation:

1.

Computation of Direct labor rate, efficiency and cost variance for the October month

$\begin{array}{l} DirectLaborRateVariance=ActualHoursX\left(ActualRate–StandardRate\right)\\ \begin{array}{l} =16,250hoursX\left(\$15.20-\$15.00\right)\hfill \\ =\$3,250 Unfavorable\hfill \\ *ActualRate=\frac{ActualDirectLaborCost}{ActualHours}\hfill \\ =\frac{\$247,000}{16,250hours}\hfill \\ =\$15.20perhour\hfill \end{array}\end{array}$

$\begin{array}{l}DirectLaborEfficiencyVariance=StandardRateX\left(ActualQuantity–StandardQuantity\right)\hfill \\ =\$15.00X\left(16,250hours–16,800hours\right)\hfill \\ =\$8,250 Favorable\hfill \\ \hfill \\ *StandardQuantity=StandardhoursallowedperunitXUnitsProduced\hfill \\ =3hoursperunitX5,600units\hfill \\ =16,800hours\hfill \end{array}$

$\begin{array}{l}DirectLaborCostVariance=DirectLaborRateVariance+DirectLaborEfficiencyVariance\hfill \\ =\$3,250\left(U\right)+\$8,250\left(F\right)\hfill \\ =\$5,000 Favorable\hfill \end{array}$

Computation of Direct labor rate, efficiency and cost variance for the November month

$\begin{array}{l} DirectLaborRateVariance=ActualHoursX\left(ActualRate–StandardRate\right)\\ \begin{array}{l} =\text{ 22},000hoursX\left(\$15.25-\$15.00\right)\hfill \\ =\$5,500 Unfavorable\hfill \\ *ActualRate=\frac{ActualDirectLaborCost}{ActualHours}\hfill \\ =\frac{\$335,500}{22,000hours}\hfill \\ =\$15.25perhour\hfill \end{array}\end{array}$

$\begin{array}{l}DirectLaborEfficiencyVariance=StandardRateX\left(ActualQuantity–StandardQuantity\right)\hfill \\ =\$15.00X\left(22,000hours–18,000hours\right)\hfill \\ =\$60,000 Unfavorable\hfill \\ \hfill \\ *StandardQuantity=StandardhoursallowedperunitXUnitsProduced\hfill \\ =3hoursperunitX\text{ 6},000units\hfill \\ =\text{ 18},000hours\hfill \end{array}$

$\begin{array}{l}DirectLaborCostVariance=DirectLaborRateVariance+DirectLaborEfficiencyVariance\hfill \\ =\$5,500\left(U\right)+\$60,000\left(U\right)\hfill \\ =\$65,500 Unfavorable\hfill \end{array}$

2.

The direct labor rate variance occurs due to the difference between the standard rate per hour and actual rate per hour. If the actual rate is less than standard rate, the variance is considered as favorable and if the actual rate is more than the standard rate, the variance is considered as unfavorable.

The direct labor efficiency variance is the variance caused by the difference between the standard hours allowed and the actual hours of direct labor incurred. The favorability of the variance depends upon the fact that whether the actual hours is more than standard hours of direct labor. If the actual hours is more than the standard hours of direct labor, the variance is termed as unfavorable and vice-versa.

The direct labor cost variance is the combination of direct labor rate and efficiency variance. The variance indicates the overall difference between the actual labor cost and the expected labor cost.

Conclusion

In the month of October:

Direct labor rate variance = $3,250 Unfavorable

Direct labor efficiency variance = $8,250 Favorable

Direct labor cost variance = $5,000 Favorable

In the month of November:

Direct labor rate variance = $5,500 Unfavorable

Direct labor efficiency variance = $60,000 Unfavorable

Direct labor cost variance = $65,500 Unfavorable