Question

Exercise 21-16 Computing and interpreting labor variances LO P3

Javonte Co. set standards of 3 hours of direct labor per unit of product and $16.60 per hour for the labor rate. During October, the company uses 21,000 hours of direct labor at a $352,800 total cost to produce 7,200 units of product. In November, the company uses 25,000 hours of direct labor at a $421,250 total cost to produce 7,600 units of product.

AH = Actual Hours
SH = Standard Hours
AR = Actual Rate
SR = Standard Rate

(1) Compute the direct labor rate variance, the direct labor efficiency variance, and the total direct labor cost variance for each of these two months. Classify each variance as favorable or unfavorable.
(2) Javonte investigates variances of more than 5% of actual direct labor cost. Which direct labor variances will the company investigate further?

Answer 1

1
October
Actual Cost								Standard Cost
AH	x	AR		AH	x	SR		SH	x	SR
21,000	x	16.80		21,000	x	16.60		21,600	x	16.60
	352800				348600				358560
			4200				9960
Direct labor rate variance				4200	Unfavorable
Direct labor efficiency variance				9960	Favorable
Total direct labor variance				5760	Favorable
November
Actual Cost								Standard Cost
AH	x	AR		AH	x	SR		SH	x	SR
25,000	x	16.85		25,000	x	16.60		22,800	x	16.60
	421250				415000				378480
			6250				36520
Direct labor rate variance				6250	Unfavorable
Direct labor efficiency variance				36520	Unfavorable
Total direct labor variance				42770	Unfavorable

2

Direct labor efficiency variance should be investigated further