Ch11- DL Variances - Lecture notes 1 PDF

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Chapter 11: Standards Costs & Variances Direct Labor Variances

Variances for Direct Materials and Direct Labor Causes for Direct Labor Variances  Paid more or less than standard labor rate. o Direct Labor Rate Variance  Used more or less direct labor hours than the standard allows. o Direct Labor Efficiency Variance The total direct labor variance is explained by two variances:  Direct Labor Rate Variance o Inquire with: Human Resources 

Direct Labor Efficiency Variance o Inquire with: Factory Manager

Direct Labor Variance The total variance can be explained using two variances: Direct Labor Rate Variance (Actual DL Rate Paid – Standard DL Rate) * Actual DL Hours Worked

Direct Labor Efficiency Variance (Actual DL Hours Incurred – Standard DL Hours) * Standard Rate

Example The standard cost for one unit of product is:

Direct material Direct labor Overhead Total cost per unit

4 lbs. @ $.50/lb. 2 hours @ $8.00/hr. 2 hours @ $1.50/hr.

Per Unit $2.00 $16.00 $3.00 $21.00

During the month of May, the company produced 100 units. It purchased and used 500 pounds of materials at $.60 per pound. Additionally, the company incurred 220 direct labor hours at a cost of $7.80 an hour.

Compute the direct labor variances. Direct Labor Rate Variance (Actual DL Rate Paid – Standard Rate) * Actual DL Hours Incurred ($7.80/Hr. - $8.00/Hr.) * 220 Hours = $44.00 Favorable Direct Labor Efficiency Variance (Actual DL Hours Incurred – Standard DL Hours) * Standard Rate (220 Hrs. – 200 Hrs.) * $8.00/Hr. = $160.00 Unfavorable Total Direct Labor Variance = $116 Unfavorable

Advantages & Disadvantages of using Standard Costs and Variances Advantages  Creates cost benchmarks  Usefulness in budgeting  Motivation for employees  Simplifies bookkeeping Disadvantages  Can result in outdated or inaccurate standards  Lack of timeliness  Greater focus is now on operational performance measures  Lean thinking  Increase in automation and decrease in direct labor Unintended behavioral consequences...