tools-for-enterprise-performance-evaluation

# If you carefully study the illustration you will see

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Unformatted text preview: te]. If you carefully study the illustration, you will see there are several ways to perform the intrinsic labor variance calculations. You can very simply compute the values for the red, blue, and green balls; noting the differences. Or, you can perform the noted algebraic calculations for the rate and efficiency variances; adding them together gives you the total variance. In performing the math operations, be very careful to note that unfavorable variances (negative numbers) offset favorable (positive numbers) variances. Download free ebooks at bookboon.com 29 Variance Analysis Tools for Enterprise Performance Evaluation 4.6 An Illustration of Direct Labor Variance Calculations Let’s continue with our illustration for Blue Rail Manufacturing. Recall that each section of railing requires that individual pieces of pipe be custom cut, welded, sanded, and painted. Welding is a slow and labor intensive process, and the company has adopted a standard of 3 labor hours for each section of rail. Skilled labor is anticipated to cost \$18 per hour. During August, remember that Blue Rail produced 3,400 sections of railing. Therefore, the standard labor cost for August is calculated as: Output -- Number of rail sections Standard hours per rail section * Standard hours to achieve output Standard rate per hour of labor Standard cost of direct labor 3,400 3.00 10,200 X \$18 \$ 183,600 Please click the advert X Download free ebooks at bookboon.com 30 The monthly performance report revealed actual labor cost of \$175,000. A closer examination of the actual cost of labor revealed the following: Variance Analysis Tools for Enterprise Performance Evaluation The monthly performance report revealed actual labor cost of \$175,000. A closer examination of the actual cost of labor revealed the following: * Actual hours of labor Actual rate per hour * Actual cost of direct labor 12,500 X \$14 \$ 175,000 The total direct labor variance was favorable \$8,600 (\$183,600 vs. \$175,000). This variance was driven by favorable wage rates: LABOR RATE VARIANCE = (SR - AR) X AH = (\$18 - \$14) X 12,500 = \$50,000 The total direct labor variance was favorable \$8,600 (\$183,600 vs. \$175,000). This variance was driven by favorable wage lower The hourly wage rate was rates: because of a shortage of highly skilled welders. The less experienced welders were paid less per hour but they also worked slower. This inefficiency shows up in theLABOR RATE VARIANCE variance: unfavorable labor efficiency = (SR - AR) X AH = (\$18 - \$14) X 12,500 = \$50,000 The hourly EFFICIENCY VARIANCE =of a s- AH) Xof highly skilled12,500) XThe less LABOR wage rate was lower because (SH hortage SR = (10,200 - welders. \$18 =<\$41,400> experienced welders were paid less per hour but they also worked slower. This inefficiency shows up in two variances labor efficiency variance: Thesethe unfavorablenet (\$50,000 + <\$41,400>) to produce the total \$8,600 favorable outcome: LABOR EFFICIENCY VARIANCE = (SH - AH) X SR = (10,200 - 12,500) X \$18 =<\$41,400> These two variances net (\$50,000 + <\$41,400>) to produce the total \$8,600 favorable outcome: Download free ebo...
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