Labor Variances Verde Company produces wheels for bicycles. During the year, 660,000 wheels were produced. The actual labor used was 360,000 hours at $9.50 per hour. Verde has the following labor standards: 1) $10.00 per hour; 2) 0.5 hour per wheel.

Answer and Explanation:

Given:

Actual output = 660,000

Actual labor hours = 360,000 at $9.50 per hour

Standard labor rate = $10 per hour

Standard output hour = 0.5 hour per wheel

Computation:

Labor Variances includes:

1. Labor Cost Variance

2. Labor Rate Variance

3. Labor Efficiency Variance

1. Labor Cost Variance = (SR×SH) - (AR×AH)

Labor Cost Variance = [$10(Actual output×Standard output hour)] - [$9.5×360000]

Labor Cost Variance = [$10×330,000] - $3,420,000

Labor Cost Variance = $120,000 (Adverse)

2.  Labor Rate Variance = (SR-AR)AH

Labor Rate Variance = ($10-$9.5)×360,000

Labor Rate Variance = $180,000 (Favorable)

3. Labor Efficiency Variance = (SH- AH)×SR

Labor Efficiency Variance = [(Actual output×Standard output hour)-360,000]×10

Labor Efficiency Variance = (330,000 - 360,000) ×10

Labor Efficiency Variance  = $300,000 (Adverse)

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