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Demonstration Problem Chapter 15 – Exercise 5 Direct Labor Variances – Solving for Unknowns Accounting What the Numbers Mean 9e

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Problem Definition Ackermans Garage uses standards to plan and control labor time and expense. The standard time for an engine tune-up is 3 hours, and the standard labor rate is $25 per hour. Last week, 42 tune-ups were completed. The labor efficiency variance was 14 hours unfavorable, and the labor rate variance totaled $140 favorable.

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Problem Requirements a.Calculate the actual direct labor hourly rate paid for tune-up work last week. b.Calculate the dollar amount of the labor efficiency variance. c.What is the most likely explanation for these two variances? Is this a good trade- off for the management of the garage to make? Explain your answer.

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Problem Solution a.Calculate the actual direct labor hourly rate paid for tune-up work last week. First: Set up the general model for analyzing labor variances and enter all known amounts.

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General model for analyzing labor variances: Problem Solution AH x AR Note: AH = Actual labor hours used AR = Actual labor rate per hour

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General model for analyzing labor variances: Problem Solution AH x ARAH x SR Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour

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General model for analyzing labor variances: Problem Solution AH x ARAH x SR Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour Labor Rate Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour SH = Standard labor hours allowed for the actual number of units produced Labor Rate Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour SH = Standard labor hours allowed for the actual number of units produced Labor Rate Variance Labor Efficiency Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance Next: Enter known amounts from the problem information into the general model for analyzing labor variances.

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Solution steps: Step 1 – Enter standard labor rate into the general model. Labor Rate Variance Labor Efficiency Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR $25 Solution steps: Step 1 – Enter standard labor rate into the general model. Labor Rate Variance Labor Efficiency Variance Calculation: $25 standard rate amount was given

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR $25 Solution steps: Step 2 – Calculate the standard hours allowed for the actual number of units produced. Standard time for an engine tune-up is 3 hours. Labor Rate Variance Labor Efficiency Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR $25126 hrs x $25 Solution steps: Step 2 – Calculate the standard hours allowed for the actual number of units produced. Standard time for an engine tune-up is 3 hours. Labor Rate Variance Labor Efficiency Variance Calculation: 3 standard hours x 42 tune-ups

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR $25126 hrs x $25 Solution steps: Step 3 – Calculate the actual hours used for the units produced. The labor efficiency variance was 14 hours unfavorable. Labor Rate Variance Labor Efficiency Variance

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR 140 hrs x $25126 hrs x $25 Solution steps: Step 3 – Calculate the actual hours used for the units produced. The labor efficiency variance was 14 hours unfavorable. Labor Rate Variance Labor Efficiency Variance Calculation: 126 standard hours + 14 unfavorable efficiency variance hours 140 hrs

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Solution steps: Step 4 – Calculate the actual hours x the standard rate. Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25 Calculation: 140 actual hours x $25 standard rate per hour $ 3,500 Solution steps: Step 4 – Calculate the actual hours x the standard rate.

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Step 5 – Enter the labor rate variance into the general model.

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Step 5 – Enter the labor rate variance into the general model. Calculation: The $140 favorable labor rate variance was given $140 F

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Step 6 – Use the actual hours x the standard rate and the favorable labor rate variance to compute the total actual cost of labor. $140 F

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Step 6 – Use the actual hours x the standard rate and the favorable labor rate variance to compute the total actual cost of labor. $140 F Calculation: $3,500 - $140 favorable labor rate variance $ 3,360

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Final Step – Compute the actual hourly rate of direct labor. $140 F $ 3, hrs x

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x $25126 hrs x $25 $ 3,500 Solution steps: Final Step – Compute the actual hourly rate of direct labor. $140 F $ 3, hrs x $24 Calculation: $3,360 / 140 direct labor hours

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x $25126 hrs x $25 $ 3,500 Solution: The actual direct labor hourly rate paid for tune-up work last week = $24 per hour. $140 F $ 3, hrs x $24

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Problem Requirements a.Calculate the actual direct labor hourly rate paid for tune-up work last week. b.Calculate the dollar amount of the labor efficiency variance. c.What is the most likely explanation for these two variances? Is this a good trade- off for the management of the garage to make? Explain your answer.

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Problem Solution a.Calculate the actual direct labor hourly rate paid for tune-up work last week. b.Calculate the dollar amount of the labor efficiency variance. Continue to complete the general model for analyzing labor variances by entering all remaining amounts.

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Solution steps: Step 1 – Calculate the total standard cost of labor. Labor Rate Variance Labor Efficiency Variance 140 hrs x $24140 hrs x $25126 hrs x $25 $ 3,360$ 3,500 $140 F

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Solution steps: Step 1 – Calculate the total standard cost of labor. Labor Rate Variance Labor Efficiency Variance 140 hrs x $24140 hrs x $25126 hrs x $25 $ 3,360$ 3,500 $140 F $ 3,150 Calculation: 126 standard hours x $25 standard rate per hour

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Solution steps: Final Step – Calculate the labor efficiency variance. Labor Rate Variance Labor Efficiency Variance 140 hrs x $24140 hrs x $ hrs x $25 $ 3,360$ 3,500 $140 F $ 3,150

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x $24140 hrs x $25126 hrs x $25 $ 3,360$ 3,500 $140 F $ 3,150 $ 350 U Calculation: $3,500 (AH x SR) - $3,150 (SH x SR) or 14 hours unfavorable efficiency variance x $25 standard rate

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General model for analyzing labor variances: Problem Solution AH x ARAH x SRSH x SR Labor Rate Variance Labor Efficiency Variance 140 hrs x $24140 hrs x $25126 hrs x $25 $ 3,360$ 3,500 $140 F $ 3,150 $ 350 U Solution: The direct labor efficiency variance = $350 unfavorable.

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Problem Requirements a.Calculate the actual direct labor hourly rate paid for tune-up work last week. b.Calculate the dollar amount of the labor efficiency variance. c.What is the most likely explanation for these two variances? Is this a good trade-off for the management of the garage to make? Explain your answer.

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Problem Solution Less skilled, lower paid workers took longer than standard to get the work done. The net variance is $210U ($350U - $140F). This was not a good trade-off based on the variance. From a qualitative viewpoint, less skilled workers may not do as good of a job.

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Accounting What the Numbers Mean 9e David H. Marshall Wayne W. McManus Daniel F. Viele You should now have a better understanding of direct labor variance information. Remember that there is a demonstration problem for each chapter that is here for your learning benefit.

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