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

2. 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

3. Labor Variance Calculations PQPQ ASSASS AASAAS Actual Price X Actual Quantity Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity Standard Price X Standard Quantity Labor Rate (P) Variance Labor Rate (P) Variance Labor (Q) Efficiency Variance Labor (Q) Efficiency Variance Total Labor Variance = +

4. Favorable and Unfavorable Labor Variances Type of VarianceVariance Occurs When Unfavorable labor rate variance Actual labor rate per hour exceeds the allowed/budgeted labor rate per hour Favorable labor rate variance Actual labor rate per hour is less than allowed/budgeted per hour Unfavorable labor efficiency variance Actual labor hours used exceeds the allowed/budgeted labor hours Favorable labor efficiency variance Actual labor hours used is less than allowed/budgeted labor hours

5. 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. 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 PA $6.20 S $6.00 S $6.00 × × × QA 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

6. 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 assignments are generally responsible for rate variances.

7. 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

8. Responsibility for Labor Variances I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. You used too much time because of poorly trained workers and poor supervision.

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

10. 10 The End