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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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 Fall '13
 CuongVu
 Management, Decision Making, Valuation

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