Pane Company’s direct labor costs for April are as follows:
Standard direct labor hours 42,000
Actual direct labor hours 41,200
Total direct labor payroll $247,200
Direct labor efficiency variance -- favorable $ 3,840
What is Pane’s direct labor rate variance?
Answer (B) is correct.
The direct labor rate variance is determined by multiplying the actual
hours worked by the difference between the standard and actual rates.
The standard rate equals the direct labor efficiency variance divided by
the difference between the standard and actual hours. The actual rate
equals the total direct labor payroll divided by the actual hours.
$3,840 ÷ (41,200 – 42,000) = $ 4.80 SR
$247,200 ÷ 41,200 = 6.00 AR
$ 1.20 diff.
× 41,200 AH
DL rate variance = $ 49,440 U
Lake’s direct labor costs for the month of May are as follows:
Standard direct labor hours allowed 12,500
Actual direct labor rate $8.25
Actual direct labor hours 10,000
Direct labor rate variance -- favorable $5,600
What was Lake’s standard direct labor rate in May?
Answer (D) is correct.
The direct labor rate variance equals the actual hours worked times the
difference between the standard and actual rates. When the standard rate
exceeds the actual rate, the variance is favorable:
AH × (SR – AR) = favorable rate variance
10,000 × (SR – $8.25) = $5,600 F
SR – $8.25 = $.56
SR = $8.81
Bolt Co. uses a standard-cost system. Bolt’s direct labor information for July is as follows:
Standard hours allowed for actual production 3,000
Actual rate paid per hour $9.35
Standard rate per hour $8.50
Labor efficiency variance $1,870 U
The actual hours worked equaled
Answer (D) is correct.
The standard hours allowed equaled 3,000, and the labor efficiency
variance was $1,870 unfavorable; that is, actual hours exceeded standard
hours. The labor efficiency variance equals the standard rate ($8.50) times the excess hours. Given that the variance is $1,870, 220 excess hours ($1,870 ÷ $8.50) must have been worked. Thus, 3,220 actual hours (3,000 standard + 220 excess) were worked.
Daniel Corporation’s direct labor costs for June were as follows: Actual direct labor hours 32,000 Standard direct labor hours 33,600 Direct labor rate variance -- favorable $6,720 Standard direct labor rate per hour $5.04 Compute Daniel’s total direct labor payroll for the month of June.
Answer (A) is correct. When the actual direct labor rate is unknown, the total direct labor payroll can be found by multiplying the actual hours by the standard rate, then subtracting the favorable labor variance. (32,000 × $5.04) $6,720 = $154,560
A company has a direct labor price variance that is favorable. Of the following, the most serious concern the company may have about this variance is that
Answer (C) is correct. A favorable labor rate variance means the company is using lower-paid workers than what the standard-setters thought should be used. These workers are apparently less experienced or otherwise less skilled. As a result, the use of lower-paid workers may lead to an unfavorable labor efficiency variance or an unfavorable materials usage variance as the lower-skilled workers require more hours or more materials than would more skilled employees.
MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure
checks) for cars. The company advertises that all services are completed within 15 minutes
for each service. On a recent Saturday, 160 cars were serviced, resulting in the following
labor variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil’s standard labor
rate is $7 per hour, determine the actual wage rate per hour and the actual hours worked.
Wage Rate ....Hours Worked
Answer (D) is correct.
Since 160 cars were serviced and each car requires 1/4 of an hour to
service, the “expected” quantity of hours, that is, the quantity that should
have been expended given the achieved level of production, was 40 (160
× .25). The actual number of hours expended can be found by
substituting in the formula for the efficiency variance:
(EQ – AQ) × SP = Labor efficiency variance
(40 – AQ) × $7.00 = $14 F
40 – AQ = 2
AQ = 38
Substituting again allows us to derive the actual wage rate paid:
AQ × (SP – AP) = Labor rate variance
38 × ($7.00 – AP) = $19 U
($7.00 – AP) = .5
AP = $7.50
Lee Manufacturing uses a standard cost system with overhead applied based on direct
labor hours. The manufacturing budget for the production of 5,000 units for the month of
May included the following information.
Direct labor (10,000 hrs. at $15 per hr.) $150,000
Variable overhead 30,000
Fixed overhead 80,000
During May, 6,000 units were produced and the direct labor efficiency variance was $1,500
unfavorable. Based on this information, the actual number of direct labor hours used in May
Answer (D) is correct.
The standard inputs per unit of output can be determined by dividing the budgeted total input hours (10,000) by the budgeted total output level (5,000), giving 2 hours of direct labor for every finished unit. Since the actual output level was 6,000, the “expected” quantity, or number of hours allowed given the achieved level of production, was 12,000 (6,000 × 2). These amounts can be substituted in the formula for the efficiency variance: (EQ – AQ) × SP = Labor efficiency variance (12,000 – AQ) × $15 = $1,500 U 12,000 – AQ = 100 AQ = 12,100
Randall Company uses standard costing and flexible budgeting and is evaluating its direct labor. The flexible budget variance can usually be broken down into two other variances identified as the
Answer (A) is correct. Any flexible budget variance for direct labor (or direct subdivided into two component variances, the rate (price) variance and the efficiency (quantity, usage) variance.
A company had a total labor variance of $15,000 favorable and a labor efficiency variance of $18,000 unfavorable. The labor price variance was
Answer (C) is correct. The total variance for labor consists of a price (rate) variance and an efficiency (usage) variance. Since the total variance is $15,000 favorable, the price variance must be $33,000 favorable (–$18,000 + $33,000 = $15,000).
The accounting records of Foster Corporation reveal a favorable labor efficiency variance for the period just ended. Which of the following comments by Foster’s executives reflect a limited knowledge of the variance investigation process? 1. “We can use statistical testing procedures to determine whether or not the variance should be investigated.” 2. “Let’s look into it. Yes, our operations might be fine; however, our standard labor time may need revision.” 3. “I don’t believe in all of these rules to decide whether or not variances should be investigated. Good judgment is the real key.” 4. “Don’t worry – the variance was caused by a random event and is well within our range of possible acceptable outcomes.” 5. “Why are you getting so upset? This is a favorable variance, so let’s forget it.”
Answer (D) is correct. No variance by itself is either good or bad. Everything depends on context and what can be revealed by the component variances (if any) of a given variance. For example, a favorable direct materials variance may reflect unrealistically pessimistic standards for materials usage, while a favorable labor variance may reflect workers rushing the process and producing inferior goods.