Explanation:
(a) Direct Labor Rate Variance:
Direct Labor Cost Variance is the difference between the actual direct labor cost, and the standard cost.
The formula for calculating the direct labor cost variance is:
Actual cost per DLH = (Actual) direct labor cost incurred / Actual amount of direct labor hours.
Actual cost per DLH = $360,000/20,000 = $18 per DLH
Direct Labor Cost Variance = [Actual Cost (AC) - Standard Cost (SC)] × Actual quantity of labor hours (AQ).
Direct Labor Cost Variance = ($18 per DLH - $16.50 per DLH) × 20,000 hours
Direct Labor Cost Variance = $1.50 × 20,000 hours
Direct Labor Cost Variance = $30,000 ( U )
The direct labor cost variance is unfavorable because because the firm paid $1.50 more per hour than expected ($18 actual cost - $16.50 standard cost).
(b) Labor Efficiency Variance:
Direct Labor Efficiency Variance: The difference between the actual quantity of labor hours and the labor hours that should have been used (standard quantity).
Direct Labor Efficiency Variance = (AQ − SQ) × SC
We must determine the standard quantity of labor hours before we could solve for the direct labor efficiency variance.
SQ = 45,000 units × 0.5 hours = 22,500 total DLH
Substitute the SQ into the calculations for the direct labor efficiency variance:
Direct Labor Efficiency Variance = (20,000 DLH - 22,500 DLH) × $16.50 per DLH
Direct Labor Efficiency Variance = $41,250 ( F )
The $41,250 direct labor efficiency variance is favorable because the employees worked 2,500 fewer hours than the flexible budget called for to produce 45,000 units.
(c) Total Direct Labor Cost Variance:
Total Direct Labor Cost Variance = Cost Variance - Efficiency Variance
Total Direct Labor Cost Variance = $30,000 ( U ) - $41,250 ( F )
Total Direct Labor Cost Variance = $11,250 ( F )
The $11,250 favorable direct labor variance suggests that total labor costs were significantly less than expectations. The reasons are:
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The employees produced 45,000 units in 20,000 hours instead of the expected 22,500 hours—hence, a favorable efficiency variance.
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The firm also paid its workers an average of $18 per labor hour instead of the standard rate of $16.50—thus, an unfavorable cost variance.
*Note:
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