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Direct Labor Variances

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 44

Causes of Labor Variances

• Two causes–Price

• Paid more per hour or less per hour than allowed in the budget

–Quantity• Used more labor hours or

fewer labor hours than allowed in the budget

Labor Variance CalculationsP

Q

A S S

A A S

Actual Price

XActual

Quantity

StandardPrice

XActual

Quantity

StandardPrice

XStandardQuantity

Labor Rate (P)Variance

Labor (Q)Efficiency Variance

Total Labor Variance

= +

Favorable and Unfavorable Labor Variances

Type of Variance Variance Occurs When

Unfavorable labor rate variance Actual labor rate per hour exceeds the allowed/budgeted labor rate per hour

Favorable labor rate varianceActual labor rate per hour is less than allowed/budgeted per hour

Unfavorable labor efficiency varianceActual labor hours used exceeds the allowed/budgeted labor hours

 Favorable labor efficiency varianceActual labor hours used is less than allowed/budgeted labor hours

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.

Labor Variances Example

= $9,610 = $9,300 = $9,000

Rate variance$310 unfavorable

Efficiency variance$300 unfavorable

P A $6.20 S $6.00 S $6.00 × × × Q A 1,550 hrs. A 1,550 hrs S 1.5*1,000 hrs

$9,610 1,550 hrs. = $6.20/hr

Total Labor Variance = $610 unfavorable

Causes of Labor Rate Variances

High skill,high rate

Low skill,low rate

Using highly paid skilled workers to

perform unskilled tasks results in an

unfavorable rate variance.

Production managers who make work assignmentsare generally responsible for rate variances.

Causes of Labor Efficiency Variances

Production managers are generally

responsible, except when materials are

inferior.

Unfavorable Labor

Efficiency Variance

Poorly Trained workers

Poor quality

materials

Insufficient demand or bottlenecks

Poor supervision of workers

Responsibility for Labor Variances

I am not responsible for the unfavorable labor

efficiency variance! You purchased cheap

material, so it took moretime to process it.

You used too much time because of poorly trained

workers and poor supervision.

Variances - Good or Bad?

actual > standardUnfavorable Variance

actual < standardFavorable Variance

Are all favorable variances good?

10

The End