Question

Calculating the Direct Labor Rate Variance and the Direct Labor Efficiency Variance Guillermo's Oil and Lube...

Calculating the Direct Labor Rate Variance and the Direct Labor Efficiency Variance

Guillermo's Oil and Lube Company is a service company that offers oil changes and lubrication for automobiles and light trucks. On average, Guillermo has found that a typical oil change takes 24 minutes and 6.2 quarts of oil are used. In June, Guillermo's Oil and Lube had 980 oil changes.

Guillermo's Oil and Lube Company provided the following information for the production of oil changes during the month of June:

Actual number of oil changes performed: 980
Actual number of direct labor hours worked: 388 hours
Actual rate paid per direct labor hour: $14.50
Standard rate per direct labor hour: $13.50

Required:

1. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June using the formula approach.

Direct labor rate variance (LRV) $ Unfavorable
Direct labor efficiency variance (LEV) $ Favorable

2. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June.

Direct labor rate variance (LRV) $ Unfavorable
Direct labor efficiency variance (LEV) $    Favorable

3. Calculate the total direct labor variance for oil changes for June.
$ Unfavorable

4. What if the actual wage rate paid in June was $12.50? What impact would that have had on the direct labor rate variance (LRV)? On the direct labor efficiency variance (LEV)? Indicate what the new variances would be below. If required, round your answers to the nearest cent.

Direct labor rate variance (LRV):
$ Favorable

Direct labor efficiency variance (LEV):
$ Favorable

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1. AR = Actual hourly wage rate
SR = Standard hourly wage rate
AH =Actual direct labor hours used
SH = Standard direct labor hours that should have been used
LRV (Labor rate variance) = (AR – SR) x AH
LEV (Labor efficiency variance) = (AH – SH) x SR

2. Total direct labor variance = (AR x AH) – (SR x SH) or LRV + LEV

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