{"id":110,"date":"2021-01-26T22:08:02","date_gmt":"2021-01-26T22:08:02","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=110"},"modified":"2021-05-12T23:59:30","modified_gmt":"2021-05-12T23:59:30","slug":"direct-labor-cost-variance","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/direct-labor-cost-variance\/","title":{"raw":"Direct Labor Cost Variance","rendered":"Direct Labor Cost Variance"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compute the direct labor cost variance<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1598 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12235858\/will-suddreth-o54RjF-C7xo-unsplash-300x206.jpg\" alt=\"Person sawing wood\" width=\"300\" height=\"206\" \/>Labor costs can be a significant expense in a manufacturing company. The human resources department and accounting will set a standard cost for labor, and the budget will be built on that. A direct labor cost variance occurs when a company pays a higher or lower price than the standard price set.\r\n\r\nThe <strong>direct labor cost variance<\/strong> is the difference between actual cost (AC) and standard cost allowed (SC) multiplied by the actual number of hours worked (AQ). Just like the direct materials cost variance, the direct labor cost variance can be done in two ways:\r\n\r\nDirect labor cost variance = <strong>(Actual Cost \u2013 Standard Cost) x Actual Quantity<\/strong>\r\n\r\nOR\r\n\r\n<strong>(Actual Cost x Actual Quantity) \u2013 (Standard Cost x Actual Quantity)<\/strong>\r\n\r\nBoulevard Blanks has set the standard cost for labor at $18 per hour.\r\n\r\nLet\u2019s look again at Boulevard Blanks partial income statement that compares budget to actual for the month of July:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Boulevard Blanks\r\nPartial Income Statement\r\nFor the month ended July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Actual<\/th>\r\n<th class=\"r\" scope=\"col\">Budget<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales revenue<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable manufacturing costs<\/strong><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed manufacturing costs<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Manufactured and sold<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nFor Boulevard Blanks, we see that the actual total direct labor cost was $46,500. That means we came in over budget for that line item by $2,760. We call that an unfavorable budget variance because it decreased our bottom line. Was that unfavorable variance due to higher than expected wages and benefits, or did our employees waste time?\r\n\r\nLet\u2019s say our accounting records show that the line workers put in a total of 2,325 hours during the month.\r\n\r\nThe actual hourly cost of labor was $46,500 \/ 2,325 = $20.00.\r\n\r\nLet\u2019s compute the direct materials cost variance:\r\n<ul>\r\n \t<li>Actual cost (AC) per unit was $20.00<\/li>\r\n \t<li>Standard cost (SQ) was $18.00<\/li>\r\n \t<li>Actual quantity (AQ) of labor hours was 2,325.<\/li>\r\n<\/ul>\r\n(AC - SC) * AQ = ($20.00 - $18.00) * 2,325 = (-$2.00) * 2,325 = $4,650.00\r\n\r\nThe direct labor cost variance was a positive $4,650.00.\r\n\r\nAlternatively:\r\n\r\n(AC * AQ) - (SC * AQ) = ($20 * 2,325) - ($18 * 2,325) = $46,500 - $41,850= $4,650\r\n\r\nWe actually paid $46,500 for labor for which we expected to pay $41,850. Since we\u2019re basing this calculation on actual quantity, this isolates the effect of high wages from the effect of employees working faster or slower than our expectations (that is calculated using the direct labor efficiency variance).\r\n\r\nReporting the absolute value of the number (without regard to the negative sign) and an unfavorable label makes this easier for management to read. We can also see that this is an unfavorable variance just based on the fact that we paid $20 per hour instead of the $18 that we used when building our budget.\r\n\r\nBefore we take a look at the direct labor efficiency variance, let\u2019s check your understanding of the cost variance.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217937[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compute the direct labor cost variance<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1598 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12235858\/will-suddreth-o54RjF-C7xo-unsplash-300x206.jpg\" alt=\"Person sawing wood\" width=\"300\" height=\"206\" \/>Labor costs can be a significant expense in a manufacturing company. The human resources department and accounting will set a standard cost for labor, and the budget will be built on that. A direct labor cost variance occurs when a company pays a higher or lower price than the standard price set.<\/p>\n<p>The <strong>direct labor cost variance<\/strong> is the difference between actual cost (AC) and standard cost allowed (SC) multiplied by the actual number of hours worked (AQ). Just like the direct materials cost variance, the direct labor cost variance can be done in two ways:<\/p>\n<p>Direct labor cost variance = <strong>(Actual Cost \u2013 Standard Cost) x Actual Quantity<\/strong><\/p>\n<p>OR<\/p>\n<p><strong>(Actual Cost x Actual Quantity) \u2013 (Standard Cost x Actual Quantity)<\/strong><\/p>\n<p>Boulevard Blanks has set the standard cost for labor at $18 per hour.<\/p>\n<p>Let\u2019s look again at Boulevard Blanks partial income statement that compares budget to actual for the month of July:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Boulevard Blanks<br \/>\nPartial Income Statement<br \/>\nFor the month ended July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Actual<\/th>\n<th class=\"r\" scope=\"col\">Budget<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales revenue<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable manufacturing costs<\/strong><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed manufacturing costs<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Manufactured and sold<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>For Boulevard Blanks, we see that the actual total direct labor cost was $46,500. That means we came in over budget for that line item by $2,760. We call that an unfavorable budget variance because it decreased our bottom line. Was that unfavorable variance due to higher than expected wages and benefits, or did our employees waste time?<\/p>\n<p>Let\u2019s say our accounting records show that the line workers put in a total of 2,325 hours during the month.<\/p>\n<p>The actual hourly cost of labor was $46,500 \/ 2,325 = $20.00.<\/p>\n<p>Let\u2019s compute the direct materials cost variance:<\/p>\n<ul>\n<li>Actual cost (AC) per unit was $20.00<\/li>\n<li>Standard cost (SQ) was $18.00<\/li>\n<li>Actual quantity (AQ) of labor hours was 2,325.<\/li>\n<\/ul>\n<p>(AC &#8211; SC) * AQ = ($20.00 &#8211; $18.00) * 2,325 = (-$2.00) * 2,325 = $4,650.00<\/p>\n<p>The direct labor cost variance was a positive $4,650.00.<\/p>\n<p>Alternatively:<\/p>\n<p>(AC * AQ) &#8211; (SC * AQ) = ($20 * 2,325) &#8211; ($18 * 2,325) = $46,500 &#8211; $41,850= $4,650<\/p>\n<p>We actually paid $46,500 for labor for which we expected to pay $41,850. Since we\u2019re basing this calculation on actual quantity, this isolates the effect of high wages from the effect of employees working faster or slower than our expectations (that is calculated using the direct labor efficiency variance).<\/p>\n<p>Reporting the absolute value of the number (without regard to the negative sign) and an unfavorable label makes this easier for management to read. We can also see that this is an unfavorable variance just based on the fact that we paid $20 per hour instead of the $18 that we used when building our budget.<\/p>\n<p>Before we take a look at the direct labor efficiency variance, let\u2019s check your understanding of the cost variance.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217937\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217937&theme=oea&iframe_resize_id=ohm217937\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-110\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Direct Labor Cost Variance. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgie State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Person sawing wood. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/o54RjF-C7xo\">https:\/\/unsplash.com\/photos\/o54RjF-C7xo<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Direct Labor Variance. <strong>Authored by<\/strong>: Education Unlocked. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/zNriZz-zCec\">https:\/\/youtu.be\/zNriZz-zCec<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Direct Labor Cost Variance\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. 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