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**Demonstration Problem**

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

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Problem Definition Ackerman’s 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 Calculate the actual direct labor hourly rate paid for tune-up work last week. Calculate the dollar amount of the labor efficiency variance. 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 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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**Problem Solution General model for analyzing labor variances: AH x AR**

Note: AH = Actual labor hours used AR = Actual labor rate per hour

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR Labor Rate Variance Note: AH = Actual labor hours used AR = Actual labor rate per hour SR = Standard labor rate per hour

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR Labor Rate Variance 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

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR Labor Rate Variance Labor Efficiency Variance 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

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH 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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**Labor Efficiency Variance**

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

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR $25 $25 Calculation: $25 standard rate amount was given Labor Rate Variance Labor Efficiency Variance Solution steps: Step 1 – Enter standard labor rate into the general model.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR $25 $25 Labor Rate Variance Labor Efficiency Variance 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.

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR $25 126 hrs x $25 Calculation: 3 standard hours x 42 tune-ups Labor Rate Variance Labor Efficiency Variance 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.

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**Labor Efficiency Variance**

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

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**Problem Solution General model for analyzing labor variances: AH x AR**

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

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 Labor Rate Variance Labor Efficiency Variance Solution steps: Step 4 – Calculate the actual hours x the standard rate.

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 Calculation: 140 actual hours x $25 standard rate per hour Labor Rate Variance Labor Efficiency Variance Solution steps: Step 4 – Calculate the actual hours x the standard rate.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 Labor Rate Variance Labor Efficiency Variance Solution steps: Step 5 – Enter the labor rate variance into the general model.

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 $140 F Calculation: The $140 favorable labor rate variance was given Labor Rate Variance Labor Efficiency Variance Solution steps: Step 5 – Enter the labor rate variance into the general model.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance 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.

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Calculation: $3,500 - $140 favorable labor rate variance Labor Rate Variance Labor Efficiency Variance 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.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance Solution steps: Final Step – Compute the actual hourly rate of direct labor.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Calculation: $3,360 / 140 direct labor hours Labor Rate Variance Labor Efficiency Variance Solution steps: Final Step – Compute the actual hourly rate of direct labor.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance Solution: The actual direct labor hourly rate paid for tune-up work last week = $24 per hour.

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Problem Requirements Calculate the actual direct labor hourly rate paid for tune-up work last week. Calculate the dollar amount of the labor efficiency variance. 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 Calculate the actual direct labor hourly rate paid for tune-up work last week. 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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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $140 F Labor Rate Variance Labor Efficiency Variance Solution steps: Step 1 – Calculate the total standard cost of labor.

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**Problem Solution General model for analyzing labor variances: AH x AR**

AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F Calculation: 126 standard hours x $25 standard rate per hour Labor Rate Variance Labor Efficiency Variance Solution steps: Step 1 – Calculate the total standard cost of labor.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F Labor Rate Variance Labor Efficiency Variance Solution steps: Final Step – Calculate the labor efficiency variance.

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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F $ 350 U Labor Rate Variance Labor Efficiency Variance 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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**Labor Efficiency Variance**

Problem Solution General model for analyzing labor variances: AH x AR AH x SR SH x SR 140 hrs x $24 140 hrs x $25 126 hrs x $25 $ 3,360 $ 3,500 $ 3,150 $140 F $ 350 U Labor Rate Variance Labor Efficiency Variance Solution: The direct labor efficiency variance = $350 unfavorable.

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Problem Requirements Calculate the actual direct labor hourly rate paid for tune-up work last week. Calculate the dollar amount of the labor efficiency variance. 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**

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. David H. Marshall Wayne W. McManus Daniel F. Viele

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© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Standard Cost Systems Chapter 23.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Standard Cost Systems Chapter 23.

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