Manufacturing Input Variances CMA Part 1 Direct Labor Variances As with the materials variance, the total labor variance (also called the flexible budget variance) is the difference between the standard labor costs for the actual level of output (the flexible budget) and the actual costs incurred by the company. Also similar to the materials variance, this total variance is attributable to variances in both labor rates and labor usage. This means that the company either paid a different wage rate than standard or used a different number of labor hours than standard for this level of output, or both. Because this is so similar to variance analysis for materials, we will not cover it in detail again, but the total labor variance can be broken down into the labor rate variance (a price variance) and the labor efficiency variance (a quantity variance). These are calculated in the exact same manner as the direct material cost and usage variances, but simply have different names. The Labor Rate Variance The labor rate variance is calculated as the direct materials price variance was calculated : (Actual Rate - Standard Rate) x Actual Hours or (AP - SP) x AQ The Labor Efficiency Variance The labor efficiency variance is calculated the same way as the direct materials quantity variance was calculated: (Actual Hours - Standard Hours for Actual Output) x Standard Rate or (AQ - SQ) x SP Note: On the Exam, you need to be able to use these formulas not only to solve for the variance itself, but also to solve for any of the Individual variables in these equations. In this second case, you will be given the variance and asked to solve for one of the quantity or price numbers, either actual or standard. This is simply using the same formulas, but solving for a different variable. Accounting for Direct Labor Variances in a Standard Cost System The production payroll is recorded by debiting Work-In-Process Inventory for the total number of standard hours for the units manufactured at the standard hourly rate. The credit is to accrued payroll at the total number of hours actually spent and at the actual hourly rate. The difference is recorded in the Direct Labor Rate Variance (the price variance) and the Direct Labor Efficiency Variance (the quantity variance) accounts. Unfavorable variances are debits, and favorable variances are credits. As with direct materials variances, the variances are closed out at the end of the period, either to Cost of Goods Sold or, if they are material, prorated among Work-In-Process Inventory, Finished Goods Inventory, a nd Cost of Goods Sold. Note: The company must also choose how the costs of employee related costs such as employee benefits and payroll taxes will be treated. They may be included in the cost of direct labor or treated as an overhead and allocated to the units produced. In some cases, these costs may be treated as a period cost. The method in which these costs are treated may have a small effect on cost of goods sold, income or inventory. Only in cases where direct labor is a large portion of the total expenses will this difference be significant.
Posted on: Sat, 15 Mar 2014 11:04:17 +0000
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