Demonstration Problem
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Transcript of Demonstration Problem
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Demonstration Problem
Chapter 15 – Exercise 11Direct Labor Variances –
Solving for Unknowns
AccountingWhat the Numbers Mean 10e
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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
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 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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• General model for analyzing labor variances:
Problem Solution
AH x AR AH 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 AR AH x SR SH 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 AR AH x SR SH 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 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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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH 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 AR AH x SR SH x SR
$25 $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 AR AH x SR SH x SR
$25 $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 AR AH x SR SH x SR
$25 126 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 AR AH x SR SH x SR
$25 126 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 AR AH x SR SH x SR
140 hrs x $25 126 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 AR AH x SR SH x SR
Solution steps:• Step 4 – Calculate the actual hours x the standard rate.
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 hrs x $25
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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $25 126 hrs x $25$ 3,500
Solution steps:• Final Step – Compute the actual hourly rate of direct labor.
$140 F
$ 3,360140 hrs x
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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $25 126 hrs x $25$ 3,500
Solution steps:• Final Step – Compute the actual hourly rate of direct labor.
$140 F
$ 3,360140 hrs x $24
Calculation:
$3,360 / 140 direct labor hours
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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $25 126 hrs x $25$ 3,500
Solution:• The actual direct labor hourly rate paid for tune-up
work last week = $24 per hour.
$140 F
$ 3,360140 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:AH x AR AH x SR SH x SR
Solution steps:• Step 1 – Calculate the total standard cost of labor.
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500
$140 F
Problem Solution
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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH x SR
Solution steps:• Step 1 – Calculate the total standard cost of labor.
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $24 140 hrs x $25 126 hrs x $25$ 3,360 $ 3,500
$140 F
$ 3,150Calculation:
126 standard hours x $25 standard rate
per hour
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• General model for analyzing labor variances:
Problem Solution
AH x AR AH x SR SH x SR
Solution steps:• Final Step – Calculate the labor efficiency variance.
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $24 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $24 140 hrs x $25 126 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 AR AH x SR SH x SR
Labor Rate Variance
Labor Efficiency Variance
140 hrs x $24 140 hrs x $25 126 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 $210 U ($350 U - $140 F). 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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AccountingWhat the Numbers Mean 10e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understanding ofdirect labor variance information.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.