Question

After evaluating Null Company’s manufacturing process, management decides to establish standards of 3 hours of direct labor per unit of product and $15 per hour for the labor rate. During October, the company uses 16,250 hours of direct labor at a $247,000 total cost to produce 5,600 units of product. In November, the company uses 22,000 hours of direct labor at a $335,500 total cost to produce 6,000 units of product.

1.Compute the direct labor rate variance, the direct labor efficiency variance, and the total direct labor cost variance for each of these two months.

2.Interpret the October direct labor variances.

Answer 1

Question – 1;

	October	November
Direct labor rate variance	$3250 U	$5500 U
Direct labor efficiency variance	$8250 F	$60000 U
Total direct labor cost variance	$5000 F	$65500 U

Explanation;

For October Month;

1. Direct labor rate variance =

(Standard rate – Actual rate) * Actual labor hours

Standard rate is given = $15

Actual rate ($247000 / 16250) = $15.20

Actual labor hours = 16250

Now, let’s put these value in the above given formula;

Direct labor rate variance ($15 - $15.20) * 16250 = $3250 Unfavourable

2. Direct labor efficiency variance =

(Standard hours – Actual hours) * Standard rate

Standard rate is given = $15

Standard labor hours (5600 * 3) = 16800

Actual labor hours = 16250

Now, let’s put these value in the above given formula;

Direct labor efficiency variance (16800 – 16250) * $15 = $8250 Favourable

3. Total direct labor cost variance =

Direct labor rate variance + Direct labor efficiency variance

Direct labor rate variance = $3250 Unfavourable

Direct labor efficiency variance = 8250 Favourable

Now, let’s put these value in the above given formula;

Total direct labor cost variance – 3250 + 8250 = $5000 Favourable

For November Month;

1. Direct labor rate variance =

(Standard rate – Actual rate) * Actual labor hours

Standard rate is given = $15

Actual rate ($335500 / 22000) = $15.25

Actual labor hours = 22000

Now, let’s put these value in the above given formula;

Direct labor rate variance ($15 - $15.25) * 22000 = $5500 Unfavourable

2. Direct labor efficiency variance =

(Standard hours – Actual hours) * Standard rate

Standard rate is given = $15

Standard labor hours (6000 * 3) = 18000

Actual labor hours = 22000

Now, let’s put these value in the above given formula;

Direct labor efficiency variance (18000 – 22000) * $15 = $60000 Unfavourable

3. Total direct labor cost variance =

Direct labor rate variance + Direct labor efficiency variance

Direct labor rate variance = $5500 Unfavourable

Direct labor efficiency variance = 60000 Unfavourable

Now, let’s put these value in the above given formula;

Total direct labor cost variance (– $5500) + (- $60000) = $65500 Unfavourable

Question – 2;

For October month, we see that there is unfavourable direct labor rate variance of $3250. It means that in this month Null Company had paid higher actual labor rate which lead to unfavourable direct labor rate variance.

But we see that in this month there is favourable direct labor efficiency variance of $8250 which means that Null Company used less number of direct labor hours in compare to standard direct labor hours, which lead to favourable direct labor efficiency variance. This shows higher efficiency of this company.

Overall we see that there is overall favourable total direct labor cost variance which is due to lower use of direct labor hours.