The difference column shows that 100 extra hours were used vs. what was expected (unfavorable). It also shows that the actual rate per hour was $0.50 lower than standard cost (favorable). The total actual cost direct labor cost was $1,550 lower than the standard cost, which is a favorable outcome.
Introduction to Labor Variances
If we used the same hours at a higher rate of pay it is called a labor rate variance. Watch this video presenting an instructor walking through the steps involved in calculating direct labor variances to learn more. If the actual rate is higher than the standard rate, the variance is unfavorable since the company paid more than what it expected. If actual rate is lower than standard rate, the variance is favorable. It is that portion of labour cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the actual labour hours spent.
Efficiency Variance Formula
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 \(\$8.00\). Actual and standard quantities and rates for direct labor for the production of 1,000 units are given in the following table. 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. When a company makes a product and compares the actual labor cost to the standard labor cost, the result is the total direct labor variance. In this case, two elements are contributing to the unfavorable outcome. Connie’s Candy paid $1.50 per hour more for labor than expected and used 0.10 hours more than expected to make one box of candy.
Module 10: Cost Variance Analysis
Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.
Utilizing formulas to figure out direct labor variances
No, because we need to multiply that difference by how many homes we produced and we need to represent the number in terms of dollars. The analysis suggests a potential trade-off between higher wages and better efficiency. Management might conclude that paying premium wages was partially justified by improved productivity. Managers can better address this situation if they have a breakdown of the variances between quantity and rate. Specifically, knowing the amount and direction of the difference for each can help them take targeted measures forimprovement. Note that in contrast to direct labor, indirect labor consists of work that is not directly related to transforming the materials into finished goods.
All tasks do not require equally skilled workers; some tasks are more complicated and require more experienced workers than others. This general fact should be kept in mind while assigning tasks to available work force. If the tasks that are not so complicated are assigned to very experienced workers, an unfavorable labor rate variance may be the result.
- The analysis suggests a potential trade-off between higher wages and better efficiency.
- Any business management cannot procure and store in advance for labor skills.
- A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory.
- A common reason of unfavorable labor rate variance is an inappropriate/inefficient use of direct labor workers by production supervisors.
- Breakdown of labor variance into planning and operational sections offers a realistic approach for results evaluation.
- We multiply these 13,125 total labor hours by our $1 difference per hour, and our price variance is $13,125.
Rate Variance and Efficiency Variance
If the outcome is unfavorable, the actual costs related to labor were more than the expected (standard) costs. If the outcome is favorable, the actual costs related to labor are less than the expected (standard) costs. Watch this video presenting an instructor walking through the steps involved in calculating direct labor variances to learn more. Direct labor rate variance arise from the difference in actual pay rate of laborers versus what is budgeted. Actual labor costs may differ from budgeted costs due to differences in rate and efficiency. In addition, the difference between the actual and standard rates sometimes simply means that there has been a change in the general wage rates in the industry.
Best practices for effective variance analysis 🔗
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. 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. This is a favorable outcome because the actual hours worked were less than the standard hours expected. As a result of this favorable outcome information, the company may consider continuing operations as they exist, or could change future budget projections to reflect higher profit margins, among other things.
Illustration – Labour efficiency variance
- The standard rate per hour is the expected rate of pay for workers to create one unit of product.
- 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).
- This is a favorable outcome because the actual hours worked were less than the standard hours expected.
- Find the direct labor rate variance of Bright Company for the month of June.
In this case, the actual rate per hour is \(\$7.50\), the standard rate per hour is \(\$8.00\), and the actual hour worked is \(0.10\) hours per box. 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. If there is no difference between the standard rate and the actual rate, the outcome will be zero, and no variance exists.
As with direct materials, the price and quantity variances add up to the total direct labor variance. A direct labor variance is caused by differences in either wage rates or hours worked. As with direct materials variances, total labor variance formula you can use either formulas or a diagram to compute direct labor variances. The direct labor (DL) variance is the difference between the total actual direct labor cost and the total standard cost. Labor efficiency variance measures how effectively labor time is used in production.