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Direct Labor Variance

The budget determines what the expected labor costs to produce the needed products will be. Management breaks down the activities needed to create a product and then determines how much time is required per direct labor hour. The estimated direct labor rate per hour is then multiplied by the number of units the company is expected to produce. This will provide an estimate of the labor hours needed.

Let's see how this works. The Unknown Comic will use the following information to calculate the direct labor variances:

• standard quantity = 0.40 direct labor hours per unit x 6,200 units = 2,480 hours
• actual direct labor hours used = 2,170 hours
• standard direct labor cost = $17 per hour
• actual direct labor cost = $18 per hour

The cost, efficiency, and total variances for direct materials are calculated as shown below: 

The company spent a total of $3,100 less than expected. You can break down this number as follows:

• $2,170 more was spent due to the fact that the actual cost of direct labor per hour, $18, was higher than the estimated cost per hour, $17.
• $5,270 was saved, because the company needed fewer labor hours than expected to produce the units. It expected to use 2,480 hours, but ended up using only 2,170 hours.

This nets out to a savings of $3,100.

By breaking down the different standards and comparing them to the actual results, you can determine what caused the changes to occur and provide an explanation to management.

Why are the direct labor variances occurring? Possible answers include

• labor costs increasing due to a new union contract and
• management hiring more experienced workers. More experienced workers may 
  • take less time to complete tasks and
  • need less overtime hours, which decreases the total costs.