With either of these formulas, the actual hours worked refers to the actual number of hours used at the actual production output. The standard rate per hour is the expected hourly rate paid to workers. The standard hours are the expected number of hours used at the actual production output.

## Calculating Direct Materials & Direct Labor Variances

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. 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.

## Direct Labor Rate Variance

Four hours are needed to complete a finished product and the company has established a standard rate of $8 per hour. The company used 39,500 direct labor hours and paid a total of $325,875. In this case, two elements are contributing to the unfavorable outcome.

## What is the difference between labor rate and efficiency variance?

Direct labor efficiency variance pertain to the difference arising from employing more labor hours than planned. Direct Labor Rate Variance is the measure of difference between the actual cost of direct https://www.business-accounting.net/ labor and the standard cost of direct labor utilized during a period. Note that both approaches—the direct labor efficiency variancecalculation and the alternative calculation—yield the sameresult.

## Chapter 8: Standard Cost Systems

- If we used the same hours at a higher rate of pay it is called a labor rate variance.
- If the actual rate is higher than the standard rate, the variance is unfavorable since the company paid more than what it expected.
- An unfavorable variance means that the cost of labor was more expensive than anticipated, while a favorable variance indicates that the cost of labor was less expensive than planned.
- The labor efficiency variance calculation presented previouslyshows that 18,900 in actual hours worked is lower than the 21,000budgeted hours.
- 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 ?
- This estimate is based on a standard mix of personnel at different pay rates, as well as a reasonable proportion of overtime hours worked.

Figure 10.6 shows how to calculate the labor rateand efficiency variances given the actual results and standardsinformation. Review this figure carefully before moving on to thenext section where these calculations are explained in detail. The standard labor cost of any product is equal to the standard quantity of labor time allowed multiplied by the wage rate that should be paid for this time. Here again, it follows that the actual labor cost may differ from standard labor cost because of the wages paid for labor, the quantity of labor used, or both. Thus, two labor variances exist—a rate variance and an efficiency variance. 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.

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. As stated earlier, variance analysis is the controlphase of budgeting. This information gives the management a way tomonitor and control production costs.

Let’s continue our discussions surrounding labor rates and hours. The labor standard may not reflect recent changes in the rates paid to employees. For example, the standard may not reflect the changes imposed by a new union contract. So Jake started work, and it isn’t going as well as expected. The time it takes to make a pair of shoes has gone from .5 to .6 hours. Mary hopes it will better as the team works together, but right now, she needs to reevaluate her labor budget and get the information to her boss.

As with direct materials variances, all positive variances areunfavorable, and all negative variances are favorable. 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. The direct labor (DL) variance is the difference between the total actual direct labor cost and the total standard cost. Enter the actual hours worked, the actual rate paid, and the standard rate pay into the calculator to determine the labor rate variance. A direct labor rate variance is the actual rate paid being different from the standard rate.

However, the rate that the new staff must be hired at is higher than the actual rate currently paid to employees. They calculate that hiring the extra staff would cost more than raising the hourly rates of the existing employees. So, they set a new 18 doing it by derivatives standard rate, and existing employees enjoy a pay raise which helps morale. As a result, employees work harder since they have been rewarded for their efforts at the company, and the total hours required for the same amount of production go down.

1.50 per hour more for labor than expected and used 0.10 hours more than expected to make one box of candy. The same calculation is shown as follows using the outcomes of the direct labor rate and time variances. 8.00, and the actual hour worked is 0.10 hours per box. 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. Recall from Figure 10.1 that the standard rate for Jerry’s is$13 per direct labor hour and the standard direct labor hours is0.10 per unit.

We then learned how to calculate variances for labor, materials and overhead costs. Remember that the total materials variance can be found by multiplying the standard cost by the standard quantity then subtracting the product of the actual cost and the actual quantity. The total overhead variance is the sum of the fixed overhead variance and the variable overhead variance. Finally, the total direct labor variance is calculated by multiplying the standard rate by the standard quantity of hours, then subtracting the product of the actual rate and the actual number of hours. A labor variance exists when the actual cost of labor for manufacturing a product differs from the standard, or forecast, cost of labor.

The accounting records also contain information about actual costs. The company A manufacture shirt, the standard cost shows that one unit of production requires 2 hours of direct labor at $5 per hour. 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). 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.

The labor rate variance is similar to the materials price variance. Here, the actual rate is the hourly rates that are currently used. The actual hours worked are the total hours worked by the employees. The formula calculates the differences between rates, given the number of hours worked. Primarily, it reviews the differences between the expected costs of labor and the actual costs of labor.