Direct Labor Variances Flashcards

1
Q

1The inventory control supervisor at a corporation reported that a large quantity of a part purchased
for a special order that was never completed remains in stock. The order was not completed because the customer
defaulted on the order. The part is not used in any of the corporation’s regular products. After consulting with the
corporation’s engineers, the vice president of production approved the substitution of the purchased part for a
regular part in a new product. The corporation’s engineers indicated that the purchased part could be substituted
providing it was modified. The units manufactured using the substituted part required additional direct labor hours
resulting in an unfavorable direct labor efficiency variance in the Production Department. The unfavorable direct
labor efficiency variance resulting from the substitution of the purchased part in inventory is best assigned to the
A. Sales manager.
B. Inventory supervisor.
C. Production manager.
D. Vice president of production.

A

Answer (D) is correct.
An unfavorable direct labor efficiency variance is normally charged to the production manager, the
person with the most control over the amount and kinds of direct labor used. However, that individual
is not responsible. (S)he was told to use the nonconforming part that required extra labor time. Thus,
the variance should be charged to the vice president of production, the individual who most influenced
the incurrence of the cost.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

2Under a standard cost system, direct labor price variances are usually not attributable to
A. Union contracts approved before the budgeting cycle.
B. Labor rate predictions.
C. The use of a single average standard rate.
D. The assignment of different skill levels of workers than planned

A

Answer (A) is correct.
The direct labor price (rate) variance is the actual hours worked times the difference between the
standard rate and the actual rate paid. This difference may be attributable to (1) a change in labor rates
since the establishment of the standards, (2) using a single average standard rate despite different rates
earned among different employees, (3) assigning higher-paid workers to jobs estimated to require
lower-paid workers (or vice versa), or (4) paying hourly rates, but basing standards on piecework rates
(or vice versa). The difference should not be caused by a union contract approved before the budgeting
cycle because such rates would have been incorporated into the standards.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

3The static budget for the month of May was for 9,000 units with direct materials at $15 per unit.
Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for the month was 8,500 units
with $127,500 in direct materials and $77,775 in direct labor expense. The direct labor standard of 45 minutes was
maintained throughout the month. Variance analysis of the performance for the month of May shows a(n)
A. Favorable direct materials usage variance of $7,500.
B. Favorable direct labor efficiency variance of $1,275.
C. Unfavorable direct labor efficiency variance of $1,275.
D. Unfavorable direct labor price variance of $1,275.

A

Answer (D) is correct.
Because direct labor for 9,000 units was budgeted at $81,000, the unit direct labor cost is $9. Thus, the
direct labor budget for 8,500 units is $76,500, and the total direct labor variance is $1,275 ($77,775 –
$76,500). Because the actual cost is greater than the budgeted amounts, the $1,275 variance is
unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no direct
labor efficiency variance was incurred. Hence, the entire $1,275 unfavorable variance must be
attributable to the direct labor rate (or price) variance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Jackson Industries employs a standard cost system in which direct materials
inventory is carried at standard cost. Jackson has established the following standards for the
p rime costs of one unit of product:
Standard Standard Standard
Quantity Price Cost
Direct materials 5 pounds $ 3.60/pound $18.00
Direct labor 1.25 hours $12.00/hour 15.00
$33.00
During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000.
The total factory wages for May were $364,000, 90% of which were for direct labor. Jackson
manufactured 22,000 units of product during May using 108,000 pounds of direct materials and
28,000 direct labor hours. Question: 4Jackson’s direct labor price (rate) variance for May is
A. $8,400 favorable.
B. $7,200 unfavorable.
C. $8,400 unfavorable.
D. $6,000 unfavorable.

A

Answer (A) is correct.
The direct labor rate variance equals the actual quantity of hours worked times the difference between
the standard and actual labor rates. Total direct labor cost was $327,600 ($364,000 × 90%), and the
actual unit direct labor cost was $11.70 ($327,600 ÷ 28,000 hours). Thus, the variance is $8,400
favorable [28,000 hours × ($12.00 – $11.70)].

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Jackson Industries employs a standard cost system in which direct materials
inventory is carried at standard cost. Jackson has established the following standards for the
p rime costs of one unit of product:
Standard Standard Standard
Quantity Price Cost
Direct materials 5 pounds $ 3.60/pound $18.00
Direct labor 1.25 hours $12.00/hour 15.00
$33.00
During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000.
The total factory wages for May were $364,000, 90% of which were for direct labor. Jackson
manufactured 22,000 units of product during May using 108,000 pounds of direct materials and
28,000 direct labor hours. Question: 5Jackson’s direct labor usage (efficiency) variance for May is
A. $5,850 favorable.
B. $6,000 unfavorable.
C. $5,850 unfavorable.
D. $6,000 favorable.

A

Answer (B) is correct.
The direct labor efficiency variance equals the standard unit cost times the difference between actual
hours and standard hours. Accordingly, the variance is $6,000 unfavorable {[28,000 hours – (1.25
hours × 22,000 units)] × $12}.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

6An unfavorable direct labor efficiency variance could be caused by a(n)
A. Unfavorable variable overhead spending variance.
B. Unfavorable direct materials usage variance
C. Unfavorable fixed overhead volume variance.
D. Favorable variable overhead spending variance

A

Answer (B) is correct.
An unfavorable direct labor efficiency variance indicates that actual hours exceeded standard hours.
Too many hours may have been used because of inefficiency on the part of employees, excessive
coffee breaks, machine down-time, inadequate materials, or materials of poor quality that required
excessive rework. An unfavorable direct materials usage variance might be related to an unfavorable
labor efficiency variance. Working on a greater quantity of direct materials may require more direct
labor time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

16A manager prepared the following table by which to analyze labor costs for the month:
Actual Hours at Actual Hours at Standard Hours at
Actual Rate Standard Rate Standard Rate
$10,000 $9,800 $8,820
What variance was $980?
A. Labor efficiency variance
B. Labor rate variance.
C. Volume variance.
D. Labor spending variance.

A

Answer (A) is correct.
The labor efficiency variance is $980 ($9,800 – $8,820). It is the difference between actual and
standard hours multiplied by the standard labor rate.
B. Labor rate variance.
C. Volume variance.
D. Labor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

23Direct labor costs for June were as follows:
Actual direct labor hours 32,000
Standard direct labor hours 33,600
Direct labor rate variance – favorable $6,720
Standard direct labor rate per hour $5.04
Compute total direct labor payroll for the month of June.
A. $154,560
B. $154,880
C. $167,680
D. $168,000

A

Answer (A) is correct.
When the actual direct labor rate is unknown, the total direct labor payroll can be found by multiplying
the actual hours by the standard rate, then subtracting the favorable labor variance.
(32,000 × $5.04) – $6,720 = $154,560

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

24A company has a direct labor price variance that is favorable. Of the following, the most serious
concern the company may have about this variance is that
A. The circumstances giving rise to the favorable variance will not continue in the future.
B. The production manager may not be using human resources as efficiently as possible.
C. The cause of the favorable variance may result in other larger unfavorable variances in the value-chain
D. Actual production is less than budgeted production.

A

Answer (C) is correct.
A favorable labor rate variance means the company is using lower-paid workers than what the
standard-setters thought should be used. These workers are apparently less experienced or otherwise
less skilled. As a result, the use of lower-paid workers may lead to an unfavorable labor efficiency
variance or an unfavorable materials usage variance as the lower-skilled workers require more hours or
more materials than would more skilled employees.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

29The accounting records of a corporation reveal a favorable labor efficiency variance for the period
just ended. Which of the following comments by the executives reflect a limited knowledge of the variance
investigation process?
1. “We can use statistical testing procedures to determine whether or not the variance should be
investigated.”
2. “Let’s look into it. Yes, our operations might be fine; however, our standard labor time may need
revision.”
3. “I don’t believe in all of these rules to decide whether or not variances should be investigated.
Good judgment is the real key.”
4. “Don’t worry – the variance was caused by a random event and is well within our range of
possible acceptable outcomes.”
5. “Why are you getting so upset? This is a favorable variance, so let’s forget it.”
A. 2 and 5 only.
B. 1, 3, and 4 only.
C. 4 and 5 only.
D. 5 only.

A

Answer (D) is correct.
No variance by itself is either good or bad. Everything depends on context and what can be revealed by
the component variances (if any) of a given variance. For example, a favorable direct materials
variance may reflect unrealistically pessimistic standards for materials usage, while a favorable labor
variance may reflect workers rushing the process and producing inferior goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

34A pizza restaurant has recently experienced a decline in profit margin although sales have remained
steady. An analysis of direct cost inputs revealed the following.
 A favorable materials price variance
 An unfavorable materials quantity variance
 A favorable labor rate variance
 An unfavorable labor efficiency variance
Which one of the following is the most likely cause of the decline in the profit margin?
A. The cheese supplier has raised prices.
B. The new employees are still learning the recipes.
C. The employees are being paid more than the budgeted standard rates.
D. The employees are working fewer hours than budgeted standard hours.

A

Answer (B) is correct.
If the new employees are still learning the recipes, their relatively unskilled labor is likely to result in
excessive materials usage and labor inefficiency. An unfavorable material quantity variance and an
unfavorable labor efficiency variance are indicated by the company’s analysis.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

35A manufacturing firm recently hired a large number of employees for an expected increase in
upcoming projects. After the first few projects were completed, the firm’s management accountants analyzed the
direct labor rate variance and found an unfavorable labor rate variance. The least likely explanation for this
unfavorable variance is
A. The new hires were less skilled.
B. A new union contract resulted in higher wages for the workers.
C. Using overly skilled employees for less skilled work, resulting in higher labor costs.
D. The actual cost of the labor is greater than the standard cost.

A

Answer (A) is correct.
An unfavorable labor rate variance is usually caused by assigning skilled workers to a production
process when the standard price calculation assumes that unskilled (and therefore lower-paid) workers
could complete the job. Thus, hiring less-skilled and lower-paid workers is unlikely to result in an
unfavorable labor rate variance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

36Firm XYZ is looking to reduce its labor costs. In doing so, it has hired workers who are less skilled.
Assigning these workers to a job will most likely result in
A. Higher-quality products.
B. An unfavorable labor rate variance.
C. Expedited job times.
D. An unfavorable efficiency variance.

A

Answer (D) is correct.
A favorable labor rate variance is usually caused by assigning workers with less skill to a job.
However, a favorable rate variance may be offset by an unfavorable efficiency variance or lowerquality
products

How well did you know this?
1
Not at all
2
3
4
5
Perfectly