Question

Calculating the Direct Labor Rate Variance and the Direct Labor Efficiency Variance

Guillermo's Oil and Lube Company is a service company that offers oil changes and lubrication for automobiles and light trucks. On average, Guillermo has found that a typical oil change takes 30 minutes and 6.2 quarts of oil are used. In June, Guillermo's Oil and Lube had 980 oil changes.

Guillermo's Oil and Lube Company provided the following information for the production of oil changes during the month of June:

Actual number of oil changes performed: 980
Actual number of direct labor hours worked: 485 hours
Actual rate paid per direct labor hour: $15.00
Standard rate per direct labor hour: $14.00

Required:

1. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June using the formula approach.

Direct labor rate variance (LRV)	$
Direct labor efficiency variance (LEV)	$

2. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June.

Direct labor rate variance (LRV)	$
Direct labor efficiency variance (LEV)	$

3. Calculate the total direct labor variance for oil changes for June.
$

4. What if the actual wage rate paid in June was $13.00? What impact would that have had on the direct labor rate variance (LRV)? On the direct labor efficiency variance (LEV)? Indicate what the new variances would be below. If required, round your answers to the nearest cent.

Direct labor rate variance (LRV):
$

Direct labor efficiency variance (LEV):
$

Answer 1

1. Labour Rate Variance = Actual Hour worked * (Standard Rate - Actual rate)

= 485 * ( $14 - $15)

= $485 unfavourable labour rate Variance.

Labour Efficiency Variance = Standard Labour Rate * ( Standard Hour - Actual Hour Worked)

whereas Standard Hour = Work done * Standard time required = 980 * 30/60 = 490 Hours

= $14 * ( 490 -485 )

= $70 Favourable Labour Efficiency Variance

2. Direct Labour Rate Variance =

(Actual Hours x Actual Rate)

-

(Actual Hours x Standard Rate)

= (485 x 15) - (485 x 14) = $485 i.e $485 unfavourable rate variance.

Direct Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate)

= (485 x 14) - (490 x 14) = -$70 i.e favourable Direct efficiency variance.

3. Total direct labor variance = (SR x SH) – (AR x AH)

= (14 x 490) - (15 x 485)

= $6860 - $7275 = -$415 i.e Unfavourable total direct labour variance.

4. If the actual direct labour rate would have been $13 instead of $15 than the LRV & LEV will be as follows;

Direct Labour Rate Variance =

(Actual Hours x Actual Rate)

-

(Actual Hours x Standard Rate)

= (485 x 13) - (485 x 14) = -$485 i.e $485 favourable rate variance.

Direct Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate)

= (485 x 14) - (490 x 14) = -$70 i.e favourable Direct efficiency variance.

Total direct labor variance = (SR x SH) – (AR x AH)

= (14 x 490) - (13 x 485)

= $6860 - $6305 = $555 i.e Favourable total direct labour variance.