Swan Company has a direct labor standard of 15 hours per unit and a standard wage rate of $14.00 per hour. In March, employees worked 14,700 hours and produced 880 units. What is the direct labor efficiency variance? (Options: $17,000 favorable; $14,020 unfavorable; $17,220 favorable; $21,000 unfavorable)
The direct labor efficiency variance is $21,000 unfavorable. Standard hours allowed for 880 units are $880\times15=13,200$ hours, so workers used $14,700-13,200=1,500$ extra hours. Multiplying the extra hours by the standard rate gives $1,500\times\$14=\$21,000$ unfavorable.
What the efficiency variance measures
The direct labor efficiency variance isolates the effect of using more or fewer labor hours than the standard allows for the actual output, valued at the standard wage rate.
Compute standard hours allowed for actual production
Standard hours allowed (SH) are:
$$SH = 880\text{ units}\times 15\text{ hours/unit} = 13{,}200\text{ hours}$$
Actual hours (AH) given are $14{,}700$.
Calculate the direct labor efficiency variance
Use the formula:
$$\text{Labor efficiency variance}=(AH-SH)\times SR$$
Substitute:
$$=(14{,}700-13{,}200)\times 14$$ $$=1{,}500\times 14=21{,}000$$
Because actual hours exceed standard hours allowed, the variance is unfavorable.
Match to the choices
The correct option is $21,000 unfavorable.
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