Labor variance analysis is used primarily as a performance evaluation measure for responsible managers in a segment of a business. Labor variance occurs when the cost of labor or the amount of labor used deviates from what was budgeted by company management during initial planning, for either a given period of time or for a specific amount of production. Direct labor variance analysis is conducted by comparing the standard direct labor rate for production with the actual direct labor rate incurred for the production of the product.
There are two parts to direct labor variance analysis. The first is a comparison of the standard rate per unit of labor with the actual rate per unit of labor, which results in the determination of the labor rate variance. The second is a comparison of the standard quantity of use of units of labor with the actual quantity of use of units of labor for the actual production achieved, which results in the determination of the labor efficiency (usage) variance.
Labor Rate Variance
This type of variance is concerned with the difference between what was paid for labor and what should have been paid for labor for the actual production achieved.
Which of the following activities are possible causes of labor rate variance? Select "Yes" for all that apply.
1. A lower-skilled laborer doing a higher-skilled task..............select Yes No Correct 1 of Item 1
2. A higher-skilled laborer doing a lower-skilled task..............select Yes No Correct 2 of Item 1
3. Unexpected overtime.................................................select Yes No Correct 3 of Item 1
Labor Efficiency Variance
This type of variance is concerned with the difference between the labor hours that were actually used and the labor hours that should have been used.
Which of the following activities are possible causes of labor efficiency variance? Select "Yes" for all that apply.
1. A higher-than-normal defect level resulting in unplanned additional work.........select Yes No Correct 4 of Item 1
2. Frequent machine breakdowns.......................................select Yes No Correct 5 of Item 1
3. Using outdated time estimates in determining the standard rate for direct labor select.......Yes No Correct 6 of Item 1
Gauging the Favorableness of Variances
When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.
Use the minus sign to indicate negative values (when the budgeted amount is greater than the actual).
If a company calculates that the actual cost for the actual hours worked by employees was $4,900,000, and the amount budgeted for those hours actually worked was $4,200,000, the actual cost for hours worked less the budgeted cost for hours worked is $. This tells you that the actual cost at actual hours worked is select greater than less than equal to Correct 2 of Item 2 the budgeted cost at actual hours worked.
What type of variance is this?
Select Favorable rate variance No variance Unfavorable rate variance Correct 3 of Item 2
If a company calculates that the budgeted cost for actual hours worked is $150,000, and the budgeted cost at the budgeted amount of hours to have been worked is $200,000, the budgeted cost at actual time worked less the budgeted cost at budgeted hours to have been worked is $. This tells you that the actual hours worked at budgeted cost is select less than equal to greater than Correct 5 of Item 2
What type of variance is this?
Select Unfavorable efficiency variance No variance Favorable efficiency variance Correct 6 of Item 2
Standard Direct Labor Cost
The controller at your shoemaking company has determined that under normal conditions, you will pay your employees $8.50 per hour, and it will take 2.8 hours of labor per pair of shoes. Given this information, calculate the standard cost of labor per pair of shoes. If required, round the standard labor per pair of shoes to the nearest cent.