8 3: Compute and Evaluate Labor Variances Business LibreTexts

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This result means the company incurs an additional $3,600 in expense by paying its employees an average of $13 per hour rather than $12. 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. 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.

Employing diagrams to work out direct labor variances

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. If the actual hours worked are less than the standard hours at the actual production output level, the variance will be a favorable variance. A favorable outcome means you used fewer hours than anticipated to make the actual number of production units. If, however, the actual hours worked are greater than the standard hours at the actual production output level, the variance will be unfavorable.

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Find the direct labor rate variance of Bright Company for the month of June. As stated earlier, variance analysis is the control phase of budgeting. This information gives the management a way to monitor and control production costs.

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Lynn was surprised to learn that direct labor and direct materials costs were so high, particularly since actual materials used and actual direct labor hours worked were below budget. Figure 8.4 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. When a company makes a product and compares the actual labor cost to the standard labor cost, the result is the total direct labor variance.

1. 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.
2. How would this unforeseen pay cut affect United’s direct labor rate variance?
3. In this question, the Bright Company has experienced a favorable labor rate variance of $45 because it has paid a lower hourly rate ($5.40) than the standard hourly rate ($5.50).
4. A direct labor variance is caused by differences in either wage rates or hours worked.

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 \(\$8.00\). In this case, the actual rate per hour is \(\$9.50\), the standard rate per hour is \(\$8.00\), and the actual hours worked per box are \(0.10\) hours. To compute the direct labor price variance, subtract the which of the following is the formula to compute the direct labor rate variance actual hours of direct labor at standard rate ($43,200) from the actual cost of direct labor ($46,800) to get a $3,600 unfavorable variance.

Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics. An overview of these two types of labor efficiency variance is given below.

This is a favorable outcome because the actual rate of pay was less than the standard rate of pay. 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. Hitech manufacturing company is highly labor intensive and uses standard costing system. The standard time to manufacture a product at Hitech is 2.5 direct labor hours. 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.