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 24 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: 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.

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 using the graphical approach.

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 $12.40? 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) The labor rate variance is same as materials price variance, it is shows the variance between the actual rate of pay & the standard cost for the production of  a product or completion of  a process.

Direct Labor rate variance= (Actual rate – Standard rate) x Actual hours worked

In the above given case we have,

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

Therefore,
Direct Labor rate variance= (Actual rate – Standard rate) x Actual hours worked

=(14.50-14)*386

=$193 UNFAVORABLE

Since the the actual rate paid exceeded the standard rate allowed for the job, therefore the variance is positive and unfavorable.

Direct labor efficiency variance is the variance that occurs when labourers/ employees are using  more or less than given  standard odirect labor-hours for a given job. It is used for checking the efficiency level .

for compution of the  the labor efficiency variance, actual direct labor-hours worked (AH), the standard direct labor-hours allowed (SH), and the standard direct labor-hour rate per hour (SR) are used.

Standard hours for the  980 oil changes = (980 x 24 mints)

=23520 mints

=23520/60

=392 hours
Labor efficiency variance= (Actual DL hours – Standard DL hours) x Standard DL rate per hours

=(386-392) x 14

=(84) hours Favorable

the variance is favorable since less hours than the standard number of hours were required to complete 980 oil changes.

(Dear Student as per the cheg policy only one answer is to be provided)