Question

Direct Labor Rate and Efficiency Variances

For the past two years, NE Company's best-selling product has been a titanium engine block. Standard direct labor hours per block are 2.0 hours. All direct labor employees are paid $24 per hour. During July, NE produced 16,000 blocks. Actual direct labor hours and costs for the month were 31,000 hours and $775,000, respectively.

1. Compute the direct labor rate variance for blocks during July. 2. Using the same data, compute the direct labor efficiency variance for engine blocks during July. Check your answer, assuming that the total direct labor cost variance is $7,000 (U). Favorable or Unfavorable.

Answer 1

• All working forms part of the answer
• Actual and Standard data for 16000 blocks

Actual DATA for		16000	blocks
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct labor	31000	$              25.00   [775000/31000]	$       7,75,000.00
Standard DATA for		16000	blocks
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct labor	32000 [16000 x 2]	$              24.00	$       7,68,000.00

• Answer 1 and 2

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$               24.00	-	$               25.00	)	x	31000
	-31000
	Variance		31000			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	32000	-	31000	)	x	$                        24.00
	24000
	Variance		24000			Favourable-F
Labor Spending Variance [For checking the answer]
(	Standard Cost	-	Actual Cost	)
(	$   7,68,000.00	-	$   7,75,000.00	)
	-7000
	Variance		7000			Unfavourable-U