Exercise 22-14A Calculating and explaining labor price and usage variances Raman

Question

Exercise 22-14A Calculating and explaining labor price and usage variances
Raman and Sons, a CPA firm, established the following standard labor cost data for completing what the firm referred to as a Class 2 tax return. Raman expected each Class 2 return to require 4.0 hours of labor at a cost of $50 per hour. The firm actually completed 600 returns. Actual labor hours averaged 4.4 hours per return and actual labor cost amounted to $46 per hour.

Required

a. Determine the total labor variance and indicate whether it is favorable (F) or unfavorable (U).
b. Determine the labor price variance and indicate whether it is favorable (F) or unfavorable (U).
c. Determine the labor usage variance and indicate whether it is favorable (F) or unfavorable (U).
d. Explain what could have caused these variances

Explanation / Answer

a. Total labor variance= Actual Hoursx Actual Rate - Standard Hours x Standard Rate                                   =4.4 *  $46-4 * $50                                   =$202.4-$200                                   =$2.4Unfavorable Total labor variance is $2.4 unfavorable. b. Labor Price Variance= Actual Hours * Actual Rate - Actual Hours * Standard Rate                                      =4.4*$46-4.4*$50                                      =$202.4-$220                                      =$17.6 Favorable. The Labor Price Variance is $17.6 Favorable c.Labor usage variance= Actual Hours * Standard Rate - Standard Hours * Standard Rate                                    =4.4*$50-4*$50                                    =$220-$200                                     =$20Unfavorable. Total Labor usage variance is $20 Unfavorable Causes of Labor Variances: Labor price variances usually result from two factors: 1. paying workers different wages than expected, and 2. misallocation of workers. Labor quantity variances relates to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department. The cause of an unfavorable variance may be poor training, worker fatigue, faullty machinery, or carelessness. These causes are the responsibility of the production department. However, if the excess time is due to inferior materials, the responsibility falls outside the production department.

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