The following data relate to labor cost for production of 8,000 cellular telephones:

The following data relate to labor cost for production of 8,000 cellular telephones:

Actual: 4,050 hrs. at $20.00 $81,000
Standard: 4,000 hrs. at $20.40 $81,600

a. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance.

b. Discuss what might have caused these variances.

Answer:

a. Rate variance: 
Direct Labor 
Rate Variance 
Direct Labor 
Rate Variance 
Direct Labor 
Rate Variance 
(Actual Rate per Hour – Standard Rate per Hour) 
=   × Actual Hours 
=   ($20.00 – $20.40) × 4,050 hours 
=   –$1,620 Favorable 
Time variance: 
Direct Labor 
Time Variance 
Direct Labor 
Time Variance 
Direct Labor 
Time Variance 

=   (Actual Direct Labor Hours – Standard Direct Labor Hours) 
× Standard Rate per Hour 
=   (4,050 hrs. – 4,000 hrs.) × $20.40 per hour 
=   $1,020 Unfavorable 
Total direct labor cost variance: 
Direct Labor 
Cost Variance 
Direct Labor 
Cost Variance 
Direct Labor 
Cost Variance 

=   Direct Labor Rate Variance + Direct Labor Time Variance 
=   –$1,620 Favorable + $1,020 Unfavorable 
=   –$600 Favorable 
b. The employees may have been less experienced workers who were paid less than 
more experienced workers or poorly trained, thereby resulting in a lower labor rate 
than planned. The lower level of experience or training may have resulted in less 
efficient performance. Thus, the actual time required was more than standard. 
Fortunately, the lost efficiency is more than offset by the lower labor rate.