8.3: Direct Labor Cost Variance

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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.

Direct Labor Cost Variance
	Actual		Standard		Difference
Direct labor quantity in hours	5,100		5,000		100
Direct labor rate per hour	$9.50		$10.00		($0.50)
Total direct labor cost	$48,450	-	$50,000	=	- $1,550

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.

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.

The following table is expanded to include this additional information.

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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.

The following equations summarize the calculations for direct labor cost variance.

Direct labor time variance = (actual hours – standard hours) x standard rate

Direct labor rate variance = (actual rate – standard rate) x actual hours

Total direct labor cost variance = direct labor time variance + direct labor rate variance