Direct Labor Variances Formula, Types, Calculation, Examples

The labor efficiency variance calculation presented previously shows that 18,900 in actual hours worked is lower than the 21,000 budgeted hours. Clearly, this is favorable since the actual hours worked was lower than the expected (budgeted) hours. The combination of the two variances can produce one overall total direct labor cost variance. Labor rate variance arises when labor is paid at a rate that differs from the standard wage rate. Labor efficiency variance arises when the actual hours worked vary from standard, resulting in a higher or lower standard time recorded for a given output.

Note that both approaches—direct labor rate variance calculation and the alternative calculation—yield the same result. Since rate variances generally arise as a result of how labor is used, production supervisors bear responsibility for seeing that labor price variances are kept under control. Labor yield variance arises when there is a variation in actual output from standard. Since this measures the performance of workers, it may be caused by worker deficiencies or by poor production methods. Labor mix variance is the difference between the actual mix of labor and standard mix, caused by hiring or training costs. 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.

In this case, the actual hours worked per box are 0.20, the standard hours per box are 0.10, and the standard rate per hour is $8.00. This is an unfavorable outcome because the actual hours worked were more than the standard hours expected per box. As a result of this unfavorable outcome information, the company may consider retraining its workers, changing the production process to be more efficient, or increasing prices to cover labor costs. In this case, the actual rate per hour is $9.50, the standard rate per hour is $8.00, and the actual hours worked per box are 0.10 hours. This is an unfavorable outcome because the actual rate per hour was more than the standard rate per hour. As a result of this unfavorable outcome information, the company may consider using cheaper labor, changing the production process to be more efficient, or increasing prices to cover labor costs.

Direct Labor Rate Variance Calculation

1. Ask a question about your financial situation providing as much detail as possible.
2. Since the actual labor rate is lower than the standard rate, the variance is positive and thus favorable.
3. During June 2022, Bright Company’s workers worked for 450 hours to manufacture 180 units of finished product.
4. The 21,000 standard hours are the hours allowed given actual production.
5. All tasks do not require equally skilled workers; some tasks are more complicated and require more experienced workers than others.

Direct labor rate variance is equal to the difference between actual hourly rate and standard hourly rate multiplied by the actual hours worked during the period. The variance would be favorable if the actual direct labor cost is less than the standard direct labor cost allowed for actual hours worked by direct labor workers during the period concerned. Conversely, it would be unfavorable if the actual direct labor cost is more than the standard direct labor cost allowed for actual hours worked. 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. The difference between the standard cost of direct labor and the actual hours of direct labor at standard rate equals the direct labor quantity variance.

Utilizing formulas to figure out direct labor variances

Next, we calculate and analyze variable manufacturing overhead cost variances. United Airlines asked a bankruptcy court to allow a one-time 4 percent pay cut for pilots, flight attendants, mechanics, flight controllers, and ticket agents. The pay cut was proposed to last as long as the company remained in bankruptcy and was expected to provide savings of approximately $620,000,000. How would this unforeseen pay cut affect United’s direct labor rate variance? The direct labor rate variance would likely be favorable, perhaps totaling close to $620,000,000, depending on how much of these savings management anticipated when the budget was first established.

Labor Efficiency Variance

This awareness helps managers make decisions that protect the financial health of their companies. The 21,000 standard hours are the hours allowed given actual production. For Jerry’s Ice Cream, the standard allows for 0.10 labor hours per unit of production. Thus the 21,000 standard hours (SH) is 0.10 hours per unit × 210,000 units produced.

What are common causes for labor variances?

An unfavorable outcome means you used more hours than anticipated to make the actual number of production units. The total direct labor variance is also found by combining the direct labor rate variance and the direct labor time variance. By showing the total direct labor variance which of the following is the formula to compute the direct labor rate variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. According to the total direct labor variance, direct labor costs were $1,200 lower than expected, a favorable 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 determines the performance of human resource department in negotiating lower wage rates with employees and labor unions.