Actual: 4,050 hrs. at $20.00 $81,000
Standard: 4,000 hrs. at $20.40 $81,600
a. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance.
b. Discuss what might have caused these variances.
Answer:
a. Rate variance:
Direct Labor
Rate Variance
Direct Labor
Rate Variance
Direct Labor
Rate Variance
(Actual Rate per Hour – Standard Rate per Hour)
= × Actual Hours
= ($20.00 – $20.40) × 4,050 hours
= –$1,620 Favorable
Time variance:
Direct Labor
Time Variance
Direct Labor
Time Variance
Direct Labor
Time Variance
= (Actual Direct Labor Hours – Standard Direct Labor Hours)
× Standard Rate per Hour
= (4,050 hrs. – 4,000 hrs.) × $20.40 per hour
= $1,020 Unfavorable
Total direct labor cost variance:
Direct Labor
Cost Variance
Direct Labor
Cost Variance
Direct Labor
Cost Variance
= Direct Labor Rate Variance + Direct Labor Time Variance
= –$1,620 Favorable + $1,020 Unfavorable
= –$600 Favorable
b. The employees may have been less experienced workers who were paid less than
more experienced workers or poorly trained, thereby resulting in a lower labor rate
than planned. The lower level of experience or training may have resulted in less
efficient performance. Thus, the actual time required was more than standard.
Fortunately, the lost efficiency is more than offset by the lower labor rate.