Demonstration Problem
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Transcript of Demonstration Problem
Demonstration Problem
Chapter 15 – Exercise 11Direct Labor Variances –
Solving for Unknowns
AccountingWhat the Numbers Mean 10e
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.
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.
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.
• General model for analyzing labor variances:
Problem Solution
AH x AR
Note:• AH = Actual labor hours used• AR = Actual labor rate per hour
• 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
• 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
• 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
• 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
• 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.
• 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
• 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
• 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
• 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
• 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
• 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
• 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
• 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.
• 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.
• 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
• 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
• 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
• 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
• 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
• 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
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.
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.
• 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
• 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
• 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
• 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
• 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.
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.
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.
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.