8 3: Compute and Evaluate Labor Variances Business LibreTexts

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. The difference in hours is multiplied by the standard price per hour, showing a $1,000 unfavorable direct labor time variance. This is offset by a larger favorable direct labor rate variance of $2,550. The net direct labor cost variance is still $1,550 (favorable), but this additional analysis shows how the time and rate differences contributed to the overall variance.

Interpreting labor efficiency variance 🔗

Standard Labour Cost per unit Actual Yield in units – Standard Yield in units expected from the actual time worked on production. The standard output of ‘X’ is 25 units per hour in a manufacturing department of a company employing 100 workers. Instead of building 50 homes as we expected, we only built 35. When performing variance analysis, the number of units we expected to make is irrelevant.

The reason is that the highly experienced workers can generally be hired only at expensive wage rates. If, on the other hand, less experienced workers are assigned the complex tasks that require higher level of expertise, a favorable labor rate variance may occur. However, these workers may cause the quality issues due to lack of expertise and inflate the firm’s internal failure costs. In order to keep the overall direct labor cost inline with standards while maintaining the output quality, it is much important to assign right tasks to right workers. Total direct labor variance can also be divided into direct labor rate and direct labor efficiency variances.

Direct Labor Time Variance

The DL rate variance is unfavorable if the actual rate per hour is higher than the standard rate. The company paid more per hour of labor than what it has estimated. Though unfavorable, the variance may have a positive effect on the efficiency of production (favorable direct labor efficiency variance) or in the quality of the finished products. Like direct labor rate variance, this variance may be favorable or unfavorable. On the other hand, if workers take an amount of time that is more than the amount of time allowed by standards, the variance is known as unfavorable direct labor efficiency variance. 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.

Rate Variance and Efficiency Variance

We might have the same number of hours at a different hourly rate, or more hours at the same rate, or some combination of these factors. Let’s first look at the standard cost variance analysis chart for labor variances. 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. It is that portion of labour cost variance which is due to the abnormal idle time of workers. This variance is shown separately to show the effect of abnormal causes affecting production like power failure, breakdown of machinery, shortage of materials etc.

• 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.
• She went to law school at DePaul University in Chicago, where she was on the Law Review, and picked up a Masters Degree in Computer Science from Marquette University in Wisconsin where she now lives.
• Jill Gilbert Welytok, JD, CPA, LLM, practices in the areas of corporate law, nonprofit law, and intellectual property.
• If the actual rate is higher than the standard rate, the variance is unfavorable since the company paid more than what it expected.
• The actual hours worked are the actual number of hours worked to create one unit of product.

Each bottle has a standard labor cost of 1.5 hours at $35.00 per hour. Calculate the labor rate variance, labor time variance, and total labor variance. Each bottle has a standard labor cost of \(1.5\) hours at \(\$35.00\) per hour. If the actual rate of pay per hour is less than the standard rate of pay per hour, the variance will be a favorable variance.

To compute the direct labor price variance, subtract the actual hours of direct labor at standard rate ($43,200) from the actual cost of direct labor ($46,800) to get a $3,600 unfavorable variance. This result means the company incurs an additional $3,600 in expense by paying its employees an average of $13 per hour rather than $12. (Figure) shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance.

Total Direct Labor Variance

Changing business environments calls for quick and responsive approaches in operations too. Total labor variance depends on the labor rates and efficient use. Sudden labor rate change such as due to a change in national wage rate policy cannot be controlled by the management. Total labor variance arising from labor rate and efficiency depends on the pre-planning and operations.

• It is that portion of labour cost variance which is due to the abnormal idle time of workers.
• The standard hours are the expected number of hours used at the actual production output.
• The standard direct labor rate was set at $5.60 per hour but the direct labor workers were actually paid at a rate of $5.40 per hour.
• An unfavorable rate variance happens when actual rates exceed standard rates.
• In this case, two elements are contributing to the unfavorable outcome.
• Identification of causes for labor variance can help management with better budget planning and forecasting.

Figure 10.43 shows the connection between the direct labor rate variance and direct labor time variance to total labor variance formula total direct labor variance. This includes the labor rate variance (both planning and operational variances) and labor efficiency variance (both planning and operational variances. Figure 8.4 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. 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.

Labor efficiency is directly linked with the labor skill levels. Ongoing and stable production staff and labor can be assessed for their skill level based on historic outputs. The management can plan accordingly for the labor hours taken to produce each product unit.

The fact that we expected to build 50 homes is irrelevant to this problem. Labor hours used directly upon raw materials to transform them into finished products is known as direct labor. This includes work performed by factory workers and machine operators that are directly related to the conversion of raw materials into finished products. The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour. Actual hours paid 1,500 hours, out of which hours not worked (abnormal idle time) are 50.

(а) Labour Cost Variance:

At the end of each production unit, the management will then account for the actual labor hours against the revised labor hours. Any deviation will be noted as labor rate operational variance as the production operations caused the variance. 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 as the sum of the two components, management can better analyze the two variances and enhance decision-making.