Standard Labor Cost Variance Calculation for Ajax Co. in January
How to calculate the total, price, and quantity labor variances for Ajax Co. in January?
Based on the data provided, how can we determine the labor price variance and labor quantity variance for Ajax Co. in January?
Calculation of Labor Variances:
The computation is as follows:
For the labor price variance:
Actual Hours × (Actual rate - Standard rate)
= 1,850 hours × ($11.80 per hour - $11 per hour)
= 1,850 hours × $0.80 per hour
= $1,480 unfavorable
For labor quantity variance:
Standard Rate × (Actual hours - Standard hours)
= $11 per hour × (1,850 hours - 2,000 hours)
= $11 per hour × -150 hours
= $1,650 favorable
Therefore, the total labor cost variance would be:
Labor price variance + labor quantity variance
= $1,480 unfavorable + $1,650 favorable
= $170 favorable
Standard Labor Cost Variance is an important metric that helps companies like Ajax Co. analyze the differences between actual and standard labor costs. In January, Ajax Co. incurred 1,850 hours of direct labor at an hourly cost of $11. The company's standard labor cost per unit is 2 hours x $11.00.
The labor price variance is calculated by multiplying the actual hours worked by the difference between the actual labor rate and the standard labor rate. In this case, Ajax Co. had an unfavorable labor price variance of $1,480, indicating that the company paid more for labor than expected based on the standard rate.
On the other hand, the labor quantity variance is computed by multiplying the standard labor rate by the difference between the actual hours worked and the standard hours. Ajax Co. had a favorable labor quantity variance of $1,650, suggesting that the company used fewer hours of labor than expected based on the standard rate.
By adding the labor price variance and labor quantity variance together, Ajax Co. obtained a total favorable labor cost variance of $170. This shows that despite the unfavorable price variance, the company was able to offset it with a favorable quantity variance, resulting in an overall positive impact on labor costs for the month of January.