Demonstration Problem

Chapter 15 – Exercise 11Direct Labor Variances –

Solving for Unknowns

AccountingWhat the Numbers Mean 10e

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 trade-off 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.

• General model for analyzing labor variances:

Problem Solution

AH x AR

Note:• AH = Actual labor hours used• AR = Actual labor rate per hour

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR

Note:• AH = Actual labor hours used• AR = Actual labor rate per hour• SR = Standard labor rate per hour

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR

Note:• AH = Actual labor hours used• AR = Actual labor rate per hour• SR = Standard labor rate per hour

Labor Rate Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

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

Labor Rate Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

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

Labor Rate Variance

Labor Efficiency Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

Next:Enter known amounts from the problem information into the general model for analyzing labor variances.

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Solution steps:• Step 1 – Enter standard labor rate into the general model.

Labor Rate Variance

Labor Efficiency Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

$25 $25

Solution steps:• Step 1 – Enter standard labor rate into the general model.

Labor Rate Variance

Labor Efficiency Variance

Calculation:

$25 standard rate amount was given

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

$25 $25

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.

Labor Rate Variance

Labor Efficiency Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

$25 126 hrs x $25

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.

Labor Rate Variance

Labor Efficiency Variance

Calculation:

3 standard hours x 42 tune-ups

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

$25 126 hrs x $25

Solution steps:• Step 3 – Calculate the actual hours used for the units produced. The

labor efficiency variance was 14 hours unfavorable.

Labor Rate Variance

Labor Efficiency Variance

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

140 hrs x $25 126 hrs x $25

Solution steps:• Step 3 – Calculate the actual hours used for the units produced. The labor

efficiency variance was 14 hours unfavorable.

Labor Rate Variance

Labor Efficiency Variance

Calculation:

126 standard hours + 14 unfavorable efficiency

variance hours

140 hrs

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Solution steps:• Step 4 – Calculate the actual hours x the standard rate.

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25

Calculation:

140 actual hours x $25 standard rate per hour

$ 3,500

Solution steps:• Step 4 – Calculate the actual hours x the standard rate.

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25$ 3,500

Solution steps:• Step 5 – Enter the labor rate variance into the general model.

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25$ 3,500

Solution steps:• Step 5 – Enter the labor rate variance into the general model.

Calculation:

The $140 favorable labor rate variance was

given

$140 F

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25$ 3,500

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.

$140 F

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x 140 hrs x $25 126 hrs x $25$ 3,500

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.

$140 F Calculation:

$3,500 - $140 favorable labor rate variance

$ 3,360

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $25 126 hrs x $25$ 3,500

Solution steps:• Final Step – Compute the actual hourly rate of direct labor.

$140 F

$ 3,360140 hrs x

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $25 126 hrs x $25$ 3,500

Solution steps:• Final Step – Compute the actual hourly rate of direct labor.

$140 F

$ 3,360140 hrs x $24

Calculation:

$3,360 / 140 direct labor hours

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $25 126 hrs x $25$ 3,500

Solution:• The actual direct labor hourly rate paid for tune-up

work last week = $24 per hour.

$140 F

$ 3,360140 hrs x $24

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

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.

• General model for analyzing labor variances:AH x AR AH x SR SH x SR

Solution steps:• Step 1 – Calculate the total standard cost of labor.

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500

$140 F

Problem Solution

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Solution steps:• Step 1 – Calculate the total standard cost of labor.

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500

$140 F

$ 3,150Calculation:

126 standard hours x $25 standard rate

per hour

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Solution steps:• Final Step – Calculate the labor efficiency variance.

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500

$140 F

$ 3,150

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500

$140 F

$ 3,150

$ 350 U

Calculation:

$3,500 (AH x SR) - $3,150 (SH x SR)or

14 hours unfavorable efficiency variance x $25 standard rate

• General model for analyzing labor variances:

Problem Solution

AH x AR AH x SR SH x SR

Labor Rate Variance

Labor Efficiency Variance

140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500

$140 F

$ 3,150

$ 350 U

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 $210 U ($350 U - $140 F). 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.

AccountingWhat the Numbers Mean 10e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understanding ofdirect labor variance information.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.