Direct Labor Rate | Price Variance:

Learning Objective of the articles:

1. Define and explain "direct labor rate | price variance" .
2. How direct labor rate or price variance is calculated?
3. What are the reasons / causes of favorable and unfavorable labor rate variance?

1. Definition and explanation
2. Direct labor rate variance formula
3. Example
4. Who is responsible for labor rate variance
5. Exercises

Definition and Explanation:

Direct Labor price variance is also termed as direct labor rate variance. This variance measures any deviation from standard in the average hourly rate paid to 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.

 Direct Labor Rate Variance Formula:

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)]

Example:

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.

Who is responsible for the labor rate variance?

Since rate 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.

Exercises:

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 per hour.

Required: Calculate labor rate variance or Labor price variance.

Solution:

 

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