Chapter 44
Managerial Accounting
Direct Labor Variances
Prepared by Diane Tanner
University of North Florida
Causes of Labor Variances
 Two causes
 Price
 Paid more per hour or
less per hour than allowed
in the budget
 Quantity
 Used more labor hours or
fewer labor hours than
allowed in the budget
Labor Variance Calculations
P
A
S
S
Q
Total Labor
Variance
A
A
S
Actual
Price
X
Actual
Quantity
Standard
Price
X
Actual
Quantity
Standard
Price
X
Standard
Quantity
=
Labor
Rate (P)
Variance
+
Labor (Q)
Efficiency
Variance
Favorable and Unfavorable Labor Variances
Type of Variance
Unfavorable labor rate variance
Variance Occurs When
Actual labor rate per hour
exceeds the allowed/budgeted
labor rate per hour
Favorable labor rate variance
Actual labor rate per hour is
less than allowed/budgeted
per hour
Unfavorable labor efficiency variance
Actual labor hours used
exceeds the allowed/budgeted
labor hours
Favorable labor efficiency variance
Actual labor hours used is less
than allowed/budgeted labor
hours
Labor Variances Example
Visor Inc. has the following direct labor standard to manufacture
one visor:
1.5 standard hours per visor at $6.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost
of $9,610 to make 1,000 visors.
$9,610  1,550 hrs. = $6.20/hr
P
Q
A $6.20
×
A 1,550 hrs.
S $6.00
×
A 1,550 hrs
= $9,610
S $6.00
S 1.5*1,000 hrs
= $9,300
Rate variance
$310 unfavorable
×
= $9,000
Efficiency variance
$300 unfavorable
Total Labor Variance = $610 unfavorable
Causes of Labor Rate Variances
High skill,
high rate
Using highly paid skilled
workers to
perform unskilled tasks
results in an
unfavorable rate variance.
Low skill,
low rate
Production managers who make work assignments
are generally responsible for rate variances.
Causes of Labor Efficiency Variances
Poorly
Trained
workers
Poor
supervision
of workers
Unfavorable
Labor
Efficiency
Variance
Insufficient
demand or
bottlenecks
Poor
quality
materials
Production managers
are generally
responsible, except
when materials are
inferior.
Responsibility for Labor Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
You used too much
time because of
poorly trained
workers and poor
supervision.
Variances - Good or Bad?
Unfavorable Variance actual > standard
Favorable Variance
Are all favorable
variances good?
actual < standard
The End
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