{"id":529,"date":"2018-04-18T15:28:35","date_gmt":"2018-04-18T15:28:35","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=529"},"modified":"2024-04-29T17:22:37","modified_gmt":"2024-04-29T17:22:37","slug":"labor-rate-variance","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/labor-rate-variance\/","title":{"raw":"Labor Rate Variance","rendered":"Labor Rate Variance"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Analyze the variance between expected labor cost and actual labor costs<\/li>\r\n<\/ul>\r\n<\/div>\r\nSo Mary needs to figure out her labor variance with the changes in staffing and wage rate. She is hopeful that Jake will be able to step up to the plate and there won\u2019t be any changes in the .5 hours per pair of shoes that she initially budgeted. <a href=\"https:\/\/www.youtube.com\/watch?v=iukNYpj8WFw\">Here is a quick review of what is included in <strong>direct<\/strong> labor!<\/a>\r\n\r\nSo here is Mary\u2019s new direct labor costs:\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 50%;\"><\/td>\r\n<th style=\"width: 50%;\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Required Production in Pairs<\/th>\r\n<td style=\"width: 50%;\">2050<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Direct labor hours-pair<\/th>\r\n<td style=\"width: 50%;\">0.5<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Total direct labor hours needed<\/th>\r\n<td style=\"width: 50%;\">1025<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Direct labor cost per hour<\/th>\r\n<td style=\"width: 50%;\">$22<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Total direct labor cost<\/th>\r\n<td style=\"width: 50%;\">$22,550<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSo going back to our chart:\r\n\r\n<img class=\"wp-image-1600 size-full aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17173916\/Screen-Shot-2018-07-17-at-10.38.28-AM.png\" alt=\"Spending Variance flows into Labor Rate Variance, Actual Hours of Input at Standard Rate, and Labor Efficiency Variance. Labor Rate Variance flows into Actual Hours of Input at Actual Rate. Labor Efficiency Variance flows into Standard Hours Allowed for Actual Output, at Standard Rate.\" width=\"595\" height=\"321\" \/>\r\n\r\nActual hours of input at actual rate= 1025 \u00d7 $22 \u0192= $22,550\r\n\r\nStandard hours of input allowed for actual output at standard rate = 1025 \u00d7 $20 = $20,000\r\n\r\nThere is a labor rate variance of $2,550 unfavorable.\r\n\r\nSo Mary takes this information to her boss, explaining that she was unable to find a qualified employee at the old rate. She also wanted to make sure her staff were happy employees, so she needed to bring them all up to that rate as well. It didn\u2019t seem fair to have the new guy making more than her faithful staff. Good management can keep good staff. Mary made a great decision! The decisions we make as managers, may be difficult. Sometimes budgets need to be adjusted, or pricing needs to be changed to continue.\r\n\r\nIt is always important, as you are starting to see, to look at all options as we work through management decisions. Are we using good materials? Is there more efficient piece of equipment? Do we have properly trained and happy staff members? \u00a0Let\u2019s continue our discussions surrounding labor rates and hours.\r\n\r\nSo Jake started work, and it isn\u2019t going as well as expected. The change in staffing has had challenges. The time it takes to make a pair of shoes has gone from .5 to .6 hours. Mary hopes it will \u00a0better as the team works together, but right now, she needs to reevaluate her labor budget and get the information to her boss.\r\n\r\nHere is what the actual looks like now:\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<tbody>\r\n<tr style=\"height: 15px;\">\r\n<td style=\"width: 50%; height: 15px;\"><\/td>\r\n<th style=\"width: 50%; height: 15px;\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Required Production in Pairs<\/th>\r\n<td style=\"width: 50%; height: 15px;\">2050<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Direct labor hours-pair<\/th>\r\n<td style=\"width: 50%; height: 15px;\">0.6<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Total direct labor hours needed<\/th>\r\n<td style=\"width: 50%; height: 15px;\">1230<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Direct labor cost per hour<\/th>\r\n<td style=\"width: 50%; height: 15px;\">$22<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Total direct labor cost<\/th>\r\n<td style=\"width: 50%; height: 15px;\">$27,060<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSo if we go back to our chart on 10.3, we can calculate our labor variance:\r\n<ul>\r\n \t<li>Actual Hours of Input at Actual Rate = 1230 \u00d7 $22= $27,060<\/li>\r\n \t<li>Actual Hours of Input at Standard Rate = 1230 \u00d7 $20= $24,600<\/li>\r\n \t<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20 = $20,500<\/li>\r\n<\/ul>\r\nSo our labor <strong>rate<\/strong> variance is $27,060 \u2212 $24,600 = $2,460 <strong>unfavorable<\/strong>\r\n<ul>\r\n \t<li>Actual Hours of Input at Standard Rate = 1230 \u00d7 $20= $24,600<\/li>\r\n \t<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20= $20,500<\/li>\r\n<\/ul>\r\nSo our labor <strong>efficiency<\/strong>\u00a0variance is $24,600 \u2212 $20,500= $4,100 <strong>unfavorable<\/strong>\r\n\r\nOur Spending Variance is the sum of those two numbers, so $6,560\u00a0<strong>unfavorable<\/strong> ($27,060\u00a0\u2212 $20,500).\r\n\r\nMary is <strong>not<\/strong>\u00a0excited about taking this information to her boss, but what can she do?\r\n\r\nSo as we discussed, we can analyze the variance for labor efficiency by using the standard cost variance analysis chart on 10.3.\r\n\r\nMary\u2019s new hire isn\u2019t doing as well as expected, but what if the opposite had happened? What if adding Jake to the team has speeded up the production process and now it was only taking .4 hours to produce a pair of shoes? Let\u2019s examine this situation further.\r\n\r\nEven with a higher direct labor cost per hour, our total direct labor cost went <strong>down<\/strong>! Let\u2019s take that apart.\r\n<ul>\r\n \t<li>Actual Hours of Input at Actual Rate = 820 \u00d7 $22= $18,040<\/li>\r\n \t<li>Actual Hours of Input at Standard Rate = 820 \u00d7 $20= $16,040<\/li>\r\n \t<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20= $20,500 (our original budget)<\/li>\r\n<\/ul>\r\nSo now, our labor rate Variance = $18,040 \u2212 $16,040= $2000 <strong>unfavorable<\/strong>\r\n\r\n(NOTE: We are still paying more per hour than budgeted)\r\n\r\nOur labor efficiency variance = $16,040 \u2212 $20,500 = $4,460\u00a0<strong>favorable<\/strong>\r\n\r\nAnd our overall spending variance = $2,460\u00a0<strong>favorable<\/strong>\r\n\r\nWe are still spending <strong>less<\/strong> on labor, even at a higher rate per hour, so our overall variance is favorable. Now Mary is a happy production manager!\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/da4048d1-80bd-467d-a97b-5518d6d0e5bf\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Analyze the variance between expected labor cost and actual labor costs<\/li>\n<\/ul>\n<\/div>\n<p>So Mary needs to figure out her labor variance with the changes in staffing and wage rate. She is hopeful that Jake will be able to step up to the plate and there won\u2019t be any changes in the .5 hours per pair of shoes that she initially budgeted. <a href=\"https:\/\/www.youtube.com\/watch?v=iukNYpj8WFw\">Here is a quick review of what is included in <strong>direct<\/strong> labor!<\/a><\/p>\n<p>So here is Mary\u2019s new direct labor costs:<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 50%;\"><\/td>\n<th style=\"width: 50%;\" scope=\"col\">Total<\/th>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Required Production in Pairs<\/th>\n<td style=\"width: 50%;\">2050<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Direct labor hours-pair<\/th>\n<td style=\"width: 50%;\">0.5<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Total direct labor hours needed<\/th>\n<td style=\"width: 50%;\">1025<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Direct labor cost per hour<\/th>\n<td style=\"width: 50%;\">$22<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Total direct labor cost<\/th>\n<td style=\"width: 50%;\">$22,550<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So going back to our chart:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-1600 size-full aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17173916\/Screen-Shot-2018-07-17-at-10.38.28-AM.png\" alt=\"Spending Variance flows into Labor Rate Variance, Actual Hours of Input at Standard Rate, and Labor Efficiency Variance. Labor Rate Variance flows into Actual Hours of Input at Actual Rate. Labor Efficiency Variance flows into Standard Hours Allowed for Actual Output, at Standard Rate.\" width=\"595\" height=\"321\" \/><\/p>\n<p>Actual hours of input at actual rate= 1025 \u00d7 $22 \u0192= $22,550<\/p>\n<p>Standard hours of input allowed for actual output at standard rate = 1025 \u00d7 $20 = $20,000<\/p>\n<p>There is a labor rate variance of $2,550 unfavorable.<\/p>\n<p>So Mary takes this information to her boss, explaining that she was unable to find a qualified employee at the old rate. She also wanted to make sure her staff were happy employees, so she needed to bring them all up to that rate as well. It didn\u2019t seem fair to have the new guy making more than her faithful staff. Good management can keep good staff. Mary made a great decision! The decisions we make as managers, may be difficult. Sometimes budgets need to be adjusted, or pricing needs to be changed to continue.<\/p>\n<p>It is always important, as you are starting to see, to look at all options as we work through management decisions. Are we using good materials? Is there more efficient piece of equipment? Do we have properly trained and happy staff members? \u00a0Let\u2019s continue our discussions surrounding labor rates and hours.<\/p>\n<p>So Jake started work, and it isn\u2019t going as well as expected. The change in staffing has had challenges. The time it takes to make a pair of shoes has gone from .5 to .6 hours. Mary hopes it will \u00a0better as the team works together, but right now, she needs to reevaluate her labor budget and get the information to her boss.<\/p>\n<p>Here is what the actual looks like now:<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr style=\"height: 15px;\">\n<td style=\"width: 50%; height: 15px;\"><\/td>\n<th style=\"width: 50%; height: 15px;\" scope=\"col\">Total<\/th>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Required Production in Pairs<\/th>\n<td style=\"width: 50%; height: 15px;\">2050<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Direct labor hours-pair<\/th>\n<td style=\"width: 50%; height: 15px;\">0.6<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Total direct labor hours needed<\/th>\n<td style=\"width: 50%; height: 15px;\">1230<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Direct labor cost per hour<\/th>\n<td style=\"width: 50%; height: 15px;\">$22<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Total direct labor cost<\/th>\n<td style=\"width: 50%; height: 15px;\">$27,060<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So if we go back to our chart on 10.3, we can calculate our labor variance:<\/p>\n<ul>\n<li>Actual Hours of Input at Actual Rate = 1230 \u00d7 $22= $27,060<\/li>\n<li>Actual Hours of Input at Standard Rate = 1230 \u00d7 $20= $24,600<\/li>\n<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20 = $20,500<\/li>\n<\/ul>\n<p>So our labor <strong>rate<\/strong> variance is $27,060 \u2212 $24,600 = $2,460 <strong>unfavorable<\/strong><\/p>\n<ul>\n<li>Actual Hours of Input at Standard Rate = 1230 \u00d7 $20= $24,600<\/li>\n<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20= $20,500<\/li>\n<\/ul>\n<p>So our labor <strong>efficiency<\/strong>\u00a0variance is $24,600 \u2212 $20,500= $4,100 <strong>unfavorable<\/strong><\/p>\n<p>Our Spending Variance is the sum of those two numbers, so $6,560\u00a0<strong>unfavorable<\/strong> ($27,060\u00a0\u2212 $20,500).<\/p>\n<p>Mary is <strong>not<\/strong>\u00a0excited about taking this information to her boss, but what can she do?<\/p>\n<p>So as we discussed, we can analyze the variance for labor efficiency by using the standard cost variance analysis chart on 10.3.<\/p>\n<p>Mary\u2019s new hire isn\u2019t doing as well as expected, but what if the opposite had happened? What if adding Jake to the team has speeded up the production process and now it was only taking .4 hours to produce a pair of shoes? Let\u2019s examine this situation further.<\/p>\n<p>Even with a higher direct labor cost per hour, our total direct labor cost went <strong>down<\/strong>! Let\u2019s take that apart.<\/p>\n<ul>\n<li>Actual Hours of Input at Actual Rate = 820 \u00d7 $22= $18,040<\/li>\n<li>Actual Hours of Input at Standard Rate = 820 \u00d7 $20= $16,040<\/li>\n<li>Standard Hours Allowed for Actual Output at Standard Rate = 1025 \u00d7 $20= $20,500 (our original budget)<\/li>\n<\/ul>\n<p>So now, our labor rate Variance = $18,040 \u2212 $16,040= $2000 <strong>unfavorable<\/strong><\/p>\n<p>(NOTE: We are still paying more per hour than budgeted)<\/p>\n<p>Our labor efficiency variance = $16,040 \u2212 $20,500 = $4,460\u00a0<strong>favorable<\/strong><\/p>\n<p>And our overall spending variance = $2,460\u00a0<strong>favorable<\/strong><\/p>\n<p>We are still spending <strong>less<\/strong> on labor, even at a higher rate per hour, so our overall variance is favorable. Now Mary is a happy production manager!<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_da4048d1-80bd-467d-a97b-5518d6d0e5bf\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/da4048d1-80bd-467d-a97b-5518d6d0e5bf?iframe_resize_id=assessment_practice_id_da4048d1-80bd-467d-a97b-5518d6d0e5bf\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\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-529\">\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>Labor Rate Variance. <strong>Authored by<\/strong>: Freedom Learning Group. <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>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":13,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Labor Rate Variance\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"8dd9cabb-807f-4e38-828f-d9b631b449fc, 0a3845d7-2197-425e-83b5-53d524933ebe","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-529","chapter","type-chapter","status-publish","hentry"],"part":109,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/529","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":14,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/529\/revisions"}],"predecessor-version":[{"id":4129,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/529\/revisions\/4129"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/109"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/529\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=529"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=529"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=529"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=529"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}