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: 388 hours
Actual rate paid per direct labor hour: $14.50
Standard rate per direct labor hour: $13.50

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)	$	Unfavorable
Direct labor efficiency variance (LEV)	$	Favorable

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

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

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

4. What if the actual wage rate paid in June was $12.50? 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):
$ Favorable

Direct labor efficiency variance (LEV):
$ Favorable

Answer 1

Answer:

1.

Direct Labor rate Variance

Actual Direct Labors hours worked = 388 hours

Labor rate Variance = (Actual Direct Labors hours * Standard rate) - (Actual Direct Labors hours * Actual rate)

                                          = (388 hours * $13.5 per change) - (388 hours * $14.5 per change)

                                         = $5,238 - $5,626

                                         = ($388)

                                         = $388 Unfavorable

Direct Labor Efficiency Variance

Standard hours per Change = 24 minutes = 24/60 = 0.4 hour

Standard hours for 980 changes = 0.4 hour * 980 = 392 hours

Labor efficiency Variance = (Standard hours * Standard rate) - (Actual hours * Standard rate)

                                                = (392 hours * $13.5 per change) - (388 hours * $13.5 per change)

                                               = $5,292 - $5,238

                                               = $54

                                               = $54 Favorable

2. Total direct Labor variance

Direct Labor variance = (Standard hours * Standard rate) - (Actual hours * Actual rate)

                                   =(392 hours * $13.5 per change) - (388 hours * $14.5 per change)

                                   = $5,292 - $5,626

                                   = $334 Unfavorable

3. If Actual wage rate is $12.5 per hour

Direct Labor rate Variance

Actual Direct Labors hours worked = 388 hours

Labor rate Variance = (Actual Direct Labors hours * Standard rate) - (Actual Direct Labors hours * Actual rate)

                                          = (388 hours * $13.5 per change) - (388 hours * $12.5 per change)

                                         = $5,238 - $4,850

                                         = $388

                                         = $388 Favorable

The Direct labor rate variance will be favorable instead of Unfavorable if Actual rate is $12.5.

There will be no change in Direct Labor Efficiency Variance because here the change is in Actual wage rate

Direct Labor rate Variance = $388 Favorable

Direct Labor Efficiency Variance = $54 Favorable