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Prepared by Diane Tanner University of North Florida

Chapter 44. Direct Labor Variances. Prepared by Diane Tanner University of North Florida. Causes of Labor Variances. Two causes Price Paid too much per hour or paid less than expected per hour Quantity Used too many DL hours or used fewer DL hours than expected. Labor Variances. P

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 44 Direct Labor Variances Prepared by Diane Tanner University of North Florida

  2. Causes of Labor Variances • Two causes • Price • Paid too much per hour or paid less than expected per hour • Quantity • Used too many DL hours or used fewer DL hours than expected

  3. Labor Variances P Q A S S 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

  4. Labor Variances P Q A S S A A S Price (Rate) Variance Quantity (Efficiency) Variance Rate per hour is more or less than allowed. Incurred too many or less than allowed hours. Total Labor Variance Price Variance + Quantity Variance

  5. Favorable and Unfavorable • If actual labor rate per hour exceeds allowed labor rate per hour, the variance = unfavorable labor rate variance • If actual labor rate per hour is less than allowed labor rate per hour, the variance = favorable labor rate variance • If actual labor hours used is less than allowed labor hours, the variance = favorable labor quantity/efficiency variance • If actual labor hours used exceeds allowed labor hours, the variance = unfavorable labor quantity/efficiency variance

  6. Rate variance$310 unfavorable Efficiency variance$300 unfavorable 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 A $6.20 S $6.00 S $6.00 × × × Q A 1,550hrs. A 1,550 hrs S 1.5*1,000 hrs = $9,610 = $9,300 = $9,000 Total Labor Variance = $610 unfavorable

  7. Labor Rate Variance Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance. High skill,high rate Low skill,low rate Production managers who make work assignmentsare generally responsible for rate variances.

  8. Labor Efficiency Variance Production managers are generally responsible, except when materials are inferior.

  9. Responsibility for Labor Variances I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it. You used too much time because of poorly trained workers and poor supervision. Production Manager Purchasing Manager

  10. Variances - Good or Bad? Unfavorable Variance actual > standard Favorable Variance actual < standard Are all favorable variances good?

  11. The End

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