If we compute for the actual rate per hour used (which will be useful for further analysis later), we would get $8.25; i.e. $325,875 divided by 39,500 hours. At first glance, the responsibility of any unfavorable direct labor efficiency variance lies with the production supervisors and/or foremen because they are generally the persons in charge of using direct labor force. 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. We actually paid $46,500 for labor for which we expected to pay $41,850.

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. Hitech manufacturing company is highly labor intensive and uses standard costing system.

Bureau of Labor Statistics

If the direct labor cost is $6.00 per hour, the variance in dollars would be $0.90 (0.15 hours × $6.00). For proper financial measurement, the variance is normally expressed in dollars rather than hours. A difference between the standard wage and actual wages paid during a certain period of time, denote the direct labor rate variance. Favorable rate variance is attained when the standard labor hours rate exceeds the actual direct labor hours rate.

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. In this https://turbo-tax.org/turbotax-premier-online-customer-ratings-product/ question, the company has experienced an unfavorable direct labor efficiency variance of $325 during March because its workers took more hours (1,850) than the hours allowed by standards (1,800) to complete 600 units.

Direct labor efficiency variance

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.

Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .

Examples for Direct Labor Rate Variance

As it turned out, the actual number of hours turned out to be 412 hours and the rate per hour was $21 per hour. Note that in contrast to direct labor, indirect labor consists of work that is not directly related to transforming the materials into finished goods. Examples include salaries of supervisors, janitors, and security guards. Reporting the absolute value of the number (without regard to the negative sign) and an Unfavorable label makes this easier for management to read. We can also see that this is an unfavorable variance just based on the fact that we paid $20 per hour instead of the $18 that we used when building our budget.

• The standard cost of direct labor and the variances for the February 2022 output is computed next.
• However, a positive value of direct labor rate variance may not always be good.
• The other two variances that are generally computed for direct labor cost are the direct labor efficiency variance and direct labor yield variance.
• If the actual direct labor cost is lower, it costs lower to produce one unit of a product than the standard direct labor rate, and therefore, it is favorable.

Due to these reasons, managers need to be cautious in using this variance, particularly when the workers’ team is fixed in short run. In such situations, a better idea may be to dispense with direct labor efficiency variance – at least for the sake of workers’ motivation at factory floor. 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. 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. If, however, the actual rate of pay per hour is greater than the standard rate of pay per hour, the variance will be unfavorable.

How to Measure Direct Labor

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.

The direct labor variance measures how efficiently the company uses labor as well as how effective it is at pricing labor. There are two components to a labor variance, the direct labor rate variance and the direct labor time variance. Usually, direct labor rate variance does not occur due to change in labor rates because they are normally pretty easy to predict. A common reason of unfavorable labor rate variance is an inappropriate/inefficient use of direct labor workers by production supervisors.

What is the difference between labor rate and efficiency variance?

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.

• All tasks do not require equally skilled workers; some tasks are more complicated and require more experienced workers than others.
• ABC Company has an annual production budget of 120,000 units and an annual DL budget of $3,840,000.
• First, calculate the direct labor hourly rate that factors in the fringe benefits, hourly pay rate, and employee payroll taxes.
• Another element this company and others must consider is a direct labor time variance.
• Since this measures the performance of workers, it may be caused by worker deficiencies or by poor production methods.

However, such costs are required in the production process of goods and must, therefore, be added to the overall cost of the product. The most common causes of labor variances are changes in employee skills, supervision, production methods capabilities and tools. Actual labor costs may differ from budgeted costs due to differences in rate and efficiency. 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.