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Demonstration Problem

Accounting What the Numbers Mean 10e. Demonstration Problem. Chapter 15 – Exercise 11 Direct Labor Variances – Solving for Unknowns. Problem Definition.

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Demonstration Problem

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  1. Accounting What the Numbers Mean 10e Demonstration Problem Chapter 15 – Exercise 11 Direct Labor Variances – Solving for Unknowns

  2. 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.

  3. Problem Requirements • Calculate the actual direct labor hourly rate paid for tune-up work last week. • Calculate the dollar amount of the labor efficiency variance. • 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.

  4. Problem Solution • 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.

  5. Problem Solution • General model for analyzing labor variances: AH x AR • Note: • AH = Actual labor hours used • AR = Actual labor rate per hour

  6. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR • Note: • AH = Actual labor hours used • AR = Actual labor rate per hour • SR = Standard labor rate per hour

  7. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR Labor Rate Variance • Note: • AH = Actual labor hours used • AR = Actual labor rate per hour • SR = Standard labor rate per hour

  8. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR Labor Rate Variance • 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

  9. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR Labor Rate Variance Labor Efficiency Variance • 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

  10. Problem Solution • General model for analyzing labor variances: 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.

  11. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 1 – Enter standard labor rate into the general model.

  12. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR $25 $25 Calculation: $25 standard rate amount was given Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 1 – Enter standard labor rate into the general model.

  13. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR $25 $25 Labor Rate Variance Labor Efficiency Variance • 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.

  14. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR $25 126 hrs x $25 Calculation: 3 standard hours x 42 tune-ups Labor Rate Variance Labor Efficiency Variance • 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.

  15. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR $25 126 hrs x $25 Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 3 – Calculate the actual hours used for the units produced. The labor efficiency variance was 14 hours unfavorable.

  16. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs 140 hrs x $25 126 hrs x $25 Calculation: 126 standard hours + 14 unfavorable efficiency variance hours Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 3 – Calculate the actual hours used for the units produced. The labor efficiency variance was 14 hours unfavorable.

  17. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 4 – Calculate the actual hours x the standard rate.

  18. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 Calculation: 140 actual hours x $25 standard rate per hour Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 4 – Calculate the actual hours x the standard rate.

  19. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 5 – Enter the labor rate variance into the general model.

  20. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 $140 F Calculation: The $140 favorable labor rate variance was given Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 5 – Enter the labor rate variance into the general model.

  21. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance • 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.

  22. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Calculation: $3,500 - $140 favorable labor rate variance Labor Rate Variance Labor Efficiency Variance • 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.

  23. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance • Solution steps: • Final Step – Compute the actual hourly rate of direct labor.

  24. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Calculation: $3,360 / 140 direct labor hours Labor Rate Variance Labor Efficiency Variance • Solution steps: • Final Step – Compute the actual hourly rate of direct labor.

  25. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance • Solution: • The actual direct labor hourly rate paid for tune-up work last week = $24 per hour.

  26. Problem Requirements • Calculate the actual direct labor hourly rate paid for tune-up work last week. • Calculate the dollar amount of the labor efficiency variance. • 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.

  27. Problem Solution • Calculate the actual direct labor hourly rate paid for tune-up work last week. • Calculate the dollar amount of the labor efficiency variance. Continue to complete the general model for analyzing labor variances by entering all remaining amounts.

  28. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 1 – Calculate the total standard cost of labor.

  29. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F Calculation: 126 standard hours x $25 standard rate per hour Labor Rate Variance Labor Efficiency Variance • Solution steps: • Step 1 – Calculate the total standard cost of labor.

  30. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 126 hrs x $25 140 hrs x $24 140 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F Labor Rate Variance Labor Efficiency Variance • Solution steps: • Final Step – Calculate the labor efficiency variance.

  31. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F $ 350 U Labor Rate Variance Labor Efficiency Variance Calculation: $3,500 (AH x SR) - $3,150 (SH x SR)or 14 hours unfavorable efficiency variance x $25 standard rate

  32. Problem Solution • General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F $ 350 U Labor Rate Variance Labor Efficiency Variance • Solution: • The direct labor efficiency variance = $350 unfavorable.

  33. Problem Requirements • Calculate the actual direct labor hourly rate paid for tune-up work last week. • Calculate the dollar amount of the labor efficiency variance. • 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.

  34. 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.

  35. Accounting What the Numbers Mean 10e 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. David H. Marshall Wayne W. McManus Daniel F. Viele

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