Question

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

9.1: Guillermo has found a typical oil change takes 24 minutes and 6.2 quarts of oil are used. In June, Guillermo had 980 oil changes.

Refer to Cornerstone Exercise 9.1. 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: 386 hours

Actual rate paid per direct labor hour: $14.50

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.

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

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

4. What if the actual wage rate paid in June was $12.40? What impact would that have had on the dirct labor rate variance (LRV)? On the direct labor efficiency variance (LEV)?

Answer 1

1. Given,

Standard Hours = 392

Rate = $ 14

Therefore amount = SH * Rate = 392* $ 14 = 5488

Actual Hours = 386

Rate = $ 14.50

Therefore amount = AH * Rate = 386 * $ 14.50 = 5597

Actual output = 980

Labour hrs reqd(980 * 24/60) = 392

DLRV= (SR-AR)AH

DLRV= (14 - 14.50) 386

DLRV= 193 U

DLEV = (SH-AH)SR

DLEV = (392 -386)14

DLEV = 84 F

3. Total Labour Variance = Std Cost - Actual Cost

Total Labour Variance = 5488 -5597

Total Labour Variance = 109 U

4. Given,

Standard Hours = 392

Rate = $ 14

Therefore amount = SH * Rate = 392* $ 14 = 5488

Actual Hours = 386

Rate = $ 12.40

Therefore amount = AH * Rate = 386 * $ 12.40 = 4786.40

Actual output = 980

Labour hrs reqd(980 * 24/60) = 392

DLRV= (SR-AR)AH

DLRV= (14 - 12.40) 386

DLRV= 617.60 F

DLEV = (SH-AH)SR

DLEV = (392 -386)14

DLEV = 84 F

Total Labour Variance = Std Cost - Actual Cost

Total Labour Variance = 5488 -4786.40

Total Labour Variance = 701.60 F