Direct Labor Rate | Price Variance:
Learning Objective of
- Define and explain "direct labor rate | price
- How direct labor rate or price variance is calculated?
- What are the reasons / causes of favorable and unfavorable labor rate
Definition and explanation
rate variance formula
Who is responsible for labor rate variance
Direct Labor price variance
is also termed as direct
labor rate variance. This variance measures any deviation from standard in the average hourly rate
direct labor workers. In other words, direct labor rate variance is the
difference between the amount of actual hours worked at actual rate and actual
hours worked at standard rate.
Following formula is used to calculate direct
labor rate variance or direct labor price variance:
[Labor rate variance = (Actual
hours worked × Actual rate) − (Actual hours worked × Standard rate)]
Suppose that 2,000 units have been produced during the period and 5,400
direct labor hours have been worked at a rate of $13.75 per direct labor
hour. Standard rate per direct labor hour is $14.00.
Calculate labor rate variance.
Calculation of direct labor rate variance.
Labor rate variance = (Actual hours worked × Actual
rate) − (Actual hours worked × Standard rate)
= (5,400 × $13.75) − (5,400 × $14.00 )
= 74,250 − 75,600
Labor rate variance = $(1,350) Favorable
Calculation shows a favorable labor rate variance
because actual rate paid to workers is less than standard rate. When the actual
rate is more than the standard rate an unfavorable labor rate variance results.
Rates paid to the workers are usually predictable.
Nevertheless, rate variances can arise through the way labor is used. Skill
workers with high hourly rates of pay may be given duties that require little
skill and call for low hourly rates of pay. This will result in an unfavorable
labor rate variance, since the actual hourly rate of pay will exceed the
standard rate specified for the particular task. In contrast, a favorable rate
variance would result when workers who are paid at a rate lower than specified
in the standard are assigned to the task. However, the low pay rate workers may
not be as efficient. Finally, overtime work at premium rates can be reason
of an unfavorable labor price variance if the overtime premium is charged to the labor account.
variances generally arise as a result of how labor is used, production
supervisors bear responsibility for seeing that labor price variances are
kept under control.
Exercise 1: Labor Variance Analysis
The processing of a product requires a standard of 0.8 direct labor hours
per unit for Operation 4-802 at a standard wage rate of $6.75 per hour. The
2,000 units actually required 1,580 direct labor hours at a cost of $6.90
Required: Calculate labor rate variance or
Labor price variance.
|Actual hours worked
|Actual hours worked
|Labor rate variance