Question

Scenario #3 (at the CPA tax preparation firm that you own during busy tax season!)
	(Labor Variance Exercise)
You pay your employees by the hour (of work that they "clock")
Last week you paid your employees $1,200 for 80 hours of work
45 tax forms got prepared last week.
The standard time expected per tax form is 2 hours. The standard rate of pay is $20
per hour.
Calculate the labor rate and efficiency variance for last week's output
(including whether these variances are
favorable or unfavorable)
Hint: Set up the 3 columns, AH x AR, AH x SR, SH x SR What you feel could have been the root cause of each of the variances, i.e., price and quantity if you were assigned a materials scenario (#1 or #2) or rate and efficiency if you were assigned the labor scenario (#3) AND… Based on your answers to 1) above, what would you, as a manager or owner, do about it?

Answer 1

Please up vote for the earnest efforts put. Do comment in case of any further queries regarding this solution.

AH: 80 hours

AR: 1200/80= $ 15

SH: 45*2 = 90 hours

SR: $ 20

AR*AH = 80*15 = 1,200

AH*SR = 80*20 = 1,600

SH*SR = 90*20 = 1,800

1. Labor Rate Variance = (AH*SR) - (AH*AR) => 1600 - 1200 = 400 (Favorable)

2. Labor Efficiency variance= (SH*SR) - (AH*SR) = 1,800 - 1600 = 200 (Favorable)

3. The reason for Variance is:

• Labor Rate Variance is favorable because the rate per hour is higher than what was actually expended.
• Labor efficency Variance is Favorable due to standard hours are higher than actual hours spent.

4. As a manager I would not sit back and relax since the Variance are Favorable. Instead would verify if standards set are too higher due to which we end up getting Favorable variances.