# O holding a manager responsible for the direct labor

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oHolding a manager responsible for the direct labor rate variance is difficult because many factorscan influence the variance including: labor market conditions, how and when workers arehired/promoted, and turnover rate in the organization.Direct Labor Efficiency Variance:the difference between the actual labor hours and standard laborhours multiplied by the standard labor rate.oThe production manager is responsible for the direct labor efficiency variance.DL Actual ResultsDL Flexible BudgetActual Sales VolumeActual Sales Volume@ Actual Hours Used@ Standard Hours Allowed@ Actual Rates@ Standard Rates(Actual Hours x Actual \$\$)(Actual Hours x Standard \$\$)(Standard Hours x Standard \$\$)(AH x AR)(AH x SR)(SHA x SR)|_____________________________| |____________________________|=DL Rate Variance=DL Efficiency Variance=AH (AR - SR)= SR (AH - SHA)|___________________________________________________________|= DL Flexible Budget Variance= (AH x AR) - (SHA x SR)DL Rate Variance –Used more/less highly skilled laborUnexpected wage or benefit increaseLabor shortage therefore paidpremium wages/bonusesIncurred overtime hoursDL Efficiency Variance –Used more/less highly skilled laborProduction equipment malfunctionedNew production equipment more efficientUsed higher quality materials (inferiormaterials)Analysis of DL Variances:oStep 1:Decide if variance is significantoStep 2:Find out why it occurredoInvestigate when:Variations from standard are expectedDetermine an acceptable range base on % or \$ amountCompare variance to acceptable rangeActivity #3ACCT 2301 Chapter 11 - Page 9
Summary of Flexible (Spending) VariancesTips for understanding and interpreting the variances follow:oVariances are always calculated by comparing actual results to the budgeted or standard results.oFirms try to hold specific managers responsible for specific variances while removing the effectsof factors that are beyond managers’ control.oThe formulas for variances allow only one factor to change (price, quantity, or volume) whileholding everything else constant at either actual or standard values (depending on the type ofvariance).oThe driving factor for a variance always appears in parentheses in the formula in the name of thevariance.DM Price Variance = Actual Quantity Purchased X (Actual Price – Standard Price)DM Quantity Variance = Standard Price X (Actual Quantity Used – Standard QuantityAllowed)DL Rate Variance = Actual Hours X (Actual Rate – Standard Rate)DL Efficiency Variance = Standard Rate X (Actual Hours – Standard Hours Allowed)oTry not the memorize rules or rely on formulas to determine whether a variance is favorable orunfavorable; just think about it.Spending or using more of a variable resource is unfavorable.Activities #4 - #6ACCT 2301 Chapter 11 - Page 10
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