A public accounting firm estimates that an audit will require the following work:

Question

Type of Auditor	Estimated Hours	Cost per Hour	Standard Costs
Manager	10	$50	$500
Senior	20	40	800
Staff	40	30	1,200
Total	70		$2,500

The following were the actual hours and costs:

Type of Auditor	Actual Hours	Actual Cost per Hour	Actual Costs
Manager	9	$52	$468
Senior	22	38	836
Staff	44	30	1,320
Total	75		$2,624

Calculate the direct labor, labor rate, and labor efficiency variances for each type of auditor and interpret them.

Accepted Answer

The direct labor variance for each type of auditor follows:

Type of Auditor	Estimated Hours	Cost per Hour	Standard Costs
Manager	10	$50	$500
Senior	20	40	800
Staff	40	30	1,200
Total	70		$2,500

The labor rate variance for each of auditor follows :
Manager ($52 per hour - $50 per hour×9hours)				= $18
Senior ($38 per hour - $40 per hour ×22)				= (44)
Staff ($30 per hour - $30 per hour ×44)				= 0
Total labor rate variance				$ (26) Favorable
The labor efficiency variance foe each type of auditor is as follows:
Manager (9 hours - 10 hours ×$50 per hour)				= ($50)
Senior(22 hours -20 hours× $40 per hour)				= 80
Staff (44 hours - 40 hours ×$30 per hour)				= 120
Total labor efficiency variance				$150 Unfavorable

Note that the direct labor variance equals the sum of the labor rate and labor efficiency variances. The favorable labor rate variance means that, on average, the auditors were paid less than expected, although managers were paid more than expected. The unfavorable labor efficiency variance means that, on average, the auditors took longer to complete the audit than expected. The manager, however, spent less time on the audit than expected.

Question 11.1: A public accounting firm estimates that an audit will requir...

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