Accounting
What the Numbers Mean 9e
Demonstration Problem
Chapter 15 – Exercise 5
Direct Labor Variances –
Solving for Unknowns
Problem Definition
• Ackerman’s Garage uses standards to plan and control
labor time and expense. The standard time for an
engine tune-up is 3 hours, and the standard labor rate
is $25 per hour. Last week, 42 tune-ups were
completed. The labor efficiency variance was 14
hours unfavorable, and the labor rate variance totaled
$140 favorable.
Problem Requirements
a. Calculate the actual direct labor hourly
rate paid for tune-up work last week.
b. Calculate the dollar amount of the labor
efficiency variance.
c. What is the most likely explanation for
these two variances? Is this a good tradeoff for the management of the garage to
make? Explain your answer.
Problem Solution
a. Calculate the actual direct labor hourly rate
paid for tune-up work last week.
First:
Set up the general model for analyzing labor
variances and enter all known amounts.
Problem Solution
• General model for analyzing labor variances:
AH x AR
Note:
• AH = Actual labor hours used
• AR = Actual labor rate per hour
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
Note:
• AH = Actual labor hours used
• AR = Actual labor rate per hour
• SR = Standard labor rate per hour
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
Labor Rate
Variance
Note:
• AH = Actual labor hours used
• AR = Actual labor rate per hour
• SR = Standard labor rate per hour
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
SH x SR
Labor Rate
Variance
Note:
•
•
•
•
AH = Actual labor hours used
AR = Actual labor rate per hour
SR = Standard labor rate per hour
SH = Standard labor hours allowed for the actual number of units
produced
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
Labor Rate
Variance
SH x SR
Labor Efficiency
Variance
Note:
•
•
•
•
AH = Actual labor hours used
AR = Actual labor rate per hour
SR = Standard labor rate per hour
SH = Standard labor hours allowed for the actual number of units
produced
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
Labor Rate
Variance
SH x SR
Labor Efficiency
Variance
Next:
Enter known amounts from the problem information
into the general model for analyzing labor variances.
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
Labor Rate
Variance
SH x SR
Labor Efficiency
Variance
Solution steps:
• Step 1 – Enter standard labor rate into the general model.
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
$25
SH x SR
$25
Calculation:
Labor Rate
Variance
$25 standard rate
Labor Efficiency
amount was given
Variance
Solution steps:
• Step 1 – Enter standard labor rate into the general model.
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
$25
Labor Rate
Variance
SH x SR
$25
Labor Efficiency
Variance
Solution steps:
• Step 2 – Calculate the standard hours allowed for the actual number
of units produced. Standard time for an engine tune-up is 3 hours.
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
$25
SH x SR
126 hrs x $25
Calculation:
Labor Rate
Variance
3 standard hours
Labor Efficiency
x 42 tune-ups
Variance
Solution steps:
• Step 2 – Calculate the standard hours allowed for the actual number of
units produced. Standard time for an engine tune-up is 3 hours.
Problem Solution
• General model for analyzing labor variances:
AH x AR
AH x SR
$25
Labor Rate
Variance
SH x SR
126 hrs x $25
Labor Efficiency
Variance
Solution steps:
• Step 3 – Calculate the actual hours used for the units produced. The
labor efficiency variance was 14 hours unfavorable.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
Calculation:
Labor Rate
Variance
126 standard hours + 14
Labor Efficiency
unfavorable efficiency
Variance
variance hours
Solution steps:
• Step 3 – Calculate the actual hours used for the units produced. The labor
efficiency variance was 14 hours unfavorable.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Step 4 – Calculate the actual hours x the standard rate.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,500
Labor Rate
Variance
Calculation:
Labor
Efficiency
140 actual
hours x $25
Variance
standard
rate per hour
Solution steps:
• Step 4 – Calculate the actual hours x the standard rate.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,500
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Step 5 – Enter the labor rate variance into the general model.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,500
$140 F
Labor Rate
Variance
Calculation:
Labor
TheEfficiency
$140 favorable
Variance
labor
rate variance was
given
Solution steps:
• Step 5 – Enter the labor rate variance into the general model.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,500
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Step 6 – Use the actual hours x the standard rate and the favorable
labor rate variance to compute the total actual cost of labor.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
Calculation:
Labor
Efficiency
$3,500
- $140 favorable
Variance
labor
rate variance
Solution steps:
• Step 6 – Use the actual hours x the standard rate and the favorable labor
rate variance to compute the total actual cost of labor.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Final Step – Compute the actual hourly rate of direct labor.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
Calculation:
Labor
Efficiency
$3,360
/ 140 direct
Variance
labor hours
Solution steps:
• Final Step – Compute the actual hourly rate of direct labor.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution:
• The actual direct labor hourly rate paid for tune-up
work last week = $24 per hour.
Problem Requirements
a. Calculate the actual direct labor hourly rate
paid for tune-up work last week.
b. Calculate the dollar amount of the labor
efficiency variance.
c. What is the most likely explanation for
these two variances? Is this a good tradeoff for the management of the garage to
make? Explain your answer.
Problem Solution
a. Calculate the actual direct labor hourly rate
paid for tune-up work last week.
b. Calculate the dollar amount of the labor
efficiency variance.
Continue to complete the general model for
analyzing labor variances by entering all
remaining amounts.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Step 1 – Calculate the total standard cost of labor.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$ 3,150
Calculation:
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Step 1 – Calculate the total standard cost of labor.
126 standard
hours x $25
standard rate
per hour
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$ 3,150
$140 F
Labor Rate
Variance
Labor Efficiency
Variance
Solution steps:
• Final Step – Calculate the labor efficiency variance.
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
$ 3,150
$ 350 U
Labor Efficiency
Variance
Calculation:
$3,500 (AH x SR) - $3,150 (SH x SR)
or
14 hours unfavorable efficiency variance x $25 standard rate
Problem Solution
• General model for analyzing labor variances:
AH x AR
140 hrs x $24
AH x SR
SH x SR
140 hrs x $25 126 hrs x $25
$ 3,360
$ 3,500
$140 F
Labor Rate
Variance
$ 3,150
$ 350 U
Labor Efficiency
Variance
Solution:
• The direct labor efficiency variance = $350 unfavorable.
Problem Requirements
a. Calculate the actual direct labor hourly rate
paid for tune-up work last week.
b. Calculate the dollar amount of the labor
efficiency variance.
c. What is the most likely explanation for
these two variances? Is this a good
trade-off for the management of the
garage to make? Explain your answer.
Problem Solution
Less skilled, lower paid workers took
longer than standard to get the work
done. The net variance is $210U
($350U - $140F). This was not a good
trade-off based on the variance. From
a qualitative viewpoint, less skilled
workers may not do as good of a job.
Accounting
What the Numbers Mean 9e
You should now have a better understanding of
direct labor variance information.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele