Labor Rate Variance Accounting for Managers

The above definition is built on the premise that you already understand direct labor, direct labor refers to the effort expended in the conversion of raw materials to finished forms. The actual amounts paid may include extra payments for shift differentials or overtime. For example, a rush order may require the payment of overtime in order to meet an aggressive delivery date. Mary’s new hire isn’t doing as well as expected, but what if the opposite had happened? What if adding Jake to the team has speeded up the production process and now it was only taking .4 hours to produce a pair of shoes?

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Total actual and standard direct labor costs are calculated by multiplying number of hours by rate, and the results are shown in the last row of the first two columns. To compute the direct labor quantity variance, subtract the standard cost of direct labor ($48,000) from the actual hours of direct labor at standard rate ($43,200). This math results in a favorable variance of $4,800, indicating that the company saves $4,800 in expenses because its employees work 400 fewer hours than expected. Like direct labor rate variance, this variance may be favorable or unfavorable.

3 Compute and Evaluate Labor Variances

  1. Because Band made 1,000 cases of books this year, employees should have worked 4,000 hours (1,000 cases x 4 hours per case).
  2. Thedirect labor rate variance would likely be favorable, perhapstotaling close to $620,000,000, depending on how much of thesesavings management anticipated when the budget was firstestablished.
  3. The standard rate per hour is the expected hourly rate paid to workers.
  4. In this example, the Hitech company has an unfavorable labor rate variance of $90 because it has paid a higher hourly rate ($7.95) than the standard hourly rate ($7.80).

In a manufacturing setting, direct labor costs are more likely measured in aggregate and then divided by either time to get the direct labor rate or by production over a given period to get the direct labor cost per unit. The direct labor efficiency variance may be computed either in hours or in dollars. Suppose, for example, the standard time to manufacture a product is one hour but the product is completed in 1.15 hours, the variance in hours would be 0.15 hours – unfavorable. If the direct labor cost is $6.00 per hour, the variance in dollars would be $0.90 (0.15 hours × $6.00). For proper financial measurement, the variance is normally expressed in dollars rather than hours. Figure 10.43 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance.

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The labor efficiency variance calculation presented previouslyshows that 18,900 in actual hours worked is lower than the 21,000budgeted hours. Clearly, this is favorable since theactual hours worked was lower than the expected (budgeted)hours. Note that both approaches—direct labor rate variance calculationand the alternative calculation—yield the same result. An adverse labor rate variance indicates higher labor costs incurred during a period compared with the standard. The combination of the two variances can produce one overall total direct labor cost variance.

Direct Labor Variance Formulas

In other words, when actual number of hours worked differ from the standard number of hours allowed to manufacture a certain number of units, labor efficiency variance occurs. For example, a company is looking to hire more staff to meet the expected cost of labor in a production facility. Hiring new staff means that they will also be able to push out more total hours worked, resulting in more product. However, the rate that the new staff must be hired at is higher than the actual rate currently paid to employees.

The standard direct labor rate is the hourly rate that was budgeted or predetermined for the work that was performed during the same period. To calculate the actual direct labor rate, you need to determine the average hourly rate that was paid to your employees during a given period. We have demonstrated how important it is for managers to be aware not only of the cost of labor, but also of the differences between budgeted labor costs and actual labor costs.

What is the difference between labor yield and mix variances?

Figure 8.4 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. When a company makes a product and compares the actual labor cost to the standard collect synonym labor cost, the result is the total direct labor variance. In this case, the actual hours worked are \(0.05\) per box, the standard hours are \(0.10\) per box, and the standard rate per hour is \(\$8.00\).

Direct labor rate variance is one of the three basic analyses of labor cost variance. The other two are direct labor efficiency variance and idle time variance. At first glance, the responsibility of any unfavorable direct labor efficiency variance lies with the production supervisors and/or foremen because they are generally the persons in charge of using direct labor force. However, it may also occur due to substandard or low quality direct materials which require more time to handle and process. If direct materials is the cause of adverse variance, then purchase manager should bear the responsibility for his negligence in acquiring the right materials for his factory. If the total actual cost is higher than the total standard cost, the variance is unfavorable since the company paid more than what it expected to pay.

With either of these formulas, the actual rate per hour refers to the actual rate of pay for workers to create one unit of product. The standard rate per hour is the expected rate of pay for workers to create one unit of product. The actual hours worked are the actual number of hours worked to create one unit of product.

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If actual rate is lower than standard rate, the variance is favorable. The actual rate of $7.50 is computed by dividing the total actual cost of labor by the actual hours ($217,500 divided by 29,000 hours). A direct labor variance is caused by differences in either wage rates or hours worked. As with direct materials variances, you can use either formulas or a diagram to compute direct labor variances. The other two variances that are generally computed for direct labor cost are the direct labor efficiency variance and direct labor yield variance. The labor efficiency variance calculation presented previously shows that 18,900 in actual hours worked is lower than the 21,000 budgeted hours.

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