Labor cost variance scenario: One type of DL

Scenario 1: One type of Direct Labor

The following information was available for the month of August:

• Standard units planned in the master budget: 1,000 units
• Total standard direct labor hours to produce standard units: 3,000 hours
• Standard cost of direct labor in the master budget: $450,000
• Actual production of Product A for the month of August: 1,200 units
• Actual direct labor cost for the month of August: 3,400 hours @ $160 per hour

Calculate the Direct Labor variances:

1. Labor rate variance
2. Labor efficiency variance
3. Labor cost variance

When CMA problems are provided this way, you need to remember that the standard quantities used in variance computations are not the one directly from the master budget.

Before we start, it is important that all your inputs are available. In particular, we still need $\text{Standard Rate (SR)}$ of direct labor and the $\text{Standard Hours (SH)}$ allowed for actual production which we can indirectly obtain from the given:

$$\text{Standard DL per unit}=(3,000\text{ hours}÷1,000\text{ units})=3\text{ hours per unit}$$

$$\text{Standard DL rate per hour (SR)}=\$450,000÷3,000\text{ hours}=\$150$$

$$\text{Standard DL hours for actual production (SH)}=3\text{ hours}\times 1,200\text{ units}=3,600\text{ hours}$$

Scenario 1.1. Labor rate variance

$$\begin{array}{rl}\text{Labor Rate Variance}& =(\text{SR}\times \text{AH})-(\text{AR}\times \text{AH})\\ & =(150\times 3,400)-(160\times 3,400)\\ & =510,000-544,000\\ & =34,000(\text{U})\end{array}$$

The variance is unfavorable because the actual rate per hour of direct labor ($160) is higher than standard rate ($150).

Scenario 1.2. Labor efficiency variance

$$\begin{array}{rl}\text{Labor Efficiency Variance}& =(\text{SR}\times \text{SH})-(\text{SR}\times \text{AH})\\ & =(150\times 3,600)-(150\times 3,400)\\ & =540,000-510,000\\ & =30,000(\text{F})\end{array}$$

The variance is favorable because the actual hours of direct labor used by production (3,400 hours) is lower than the standard hours (3,600 hours).

Scenario 1.3. Labor cost variance

$$\begin{array}{rl}\text{Labor Cost Variance}& =(\text{SR}\times \text{SH})-(\text{AR}\times \text{AH})\\ & =(150\times 3,600)-(160\times 3,400)\\ & =540,000-544,000\\ & =4,000(\text{U})\end{array}$$

The labor cost variance can also be a summation of the rate and efficiency variances:

$$\begin{array}{rl}\text{Labor Cost Variance}& =\text{Labor Rate Variance}+\text{Labor Efficiency Variance}\\ & =34,000(\text{U})+30,000(\text{F})\\ & =4,000(\text{U})\end{array}$$

The variance is unfavorable because the actual cost is higher than the standard costs.