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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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Presentation on theme: "Demonstration Problem Chapter 15 – Exercise 5 Direct Labor Variances – Solving for Unknowns Accounting What the Numbers Mean 9e."— Presentation transcript:

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

2 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.

3 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.

4 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.

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

6 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

7 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

8 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

9 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

10 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.

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 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.

19 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.

20 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

21 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

22 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

23 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 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

25 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

26 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.

27 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.

28 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

29 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

30 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

31 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

32 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.

33 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.

34 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.

35 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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