Wize University Managerial Accounting Textbook > Standard Costing & Variance Analysis
Direct Labor Variances
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Direct Labour Variances
A direct labour variance is the difference between the standard cost of direct labour (expected) and the actual cost. The variance is made up of two other variances:
- Rate/Price Variance: Difference between what was actually paid for labour and what the standard cost of labour is (what we expected to pay).
- Quantity/Efficiency Variance: Difference between the actual quantity of labour used and what the standard quantity is (what we expected to use).
- Spending Variance: The sum of the price and quantity variance.
What causes a Direct Labour price variance?
- Increases in the national minimum wage (Unfavourable)
- Hiring labour force that is more skilled than expected. (Unfavourable)
- Effective negotiations by labour unions. (Unfavourable)
- Hiring more un-skilled workers. (Favourable)
- Decrease in overall market wage rates. (Favourable)
- Incorrect Standard (Favourable or Unfavourable)
What causes a Direct Labour quantity variance?
- Hiring labour force that is more skilled than expected (Favourable)
- Training workforce on better production techniques. (Favourable)
- Using better quality materials. (Favourable)
- Hiring labour force that is less skilled than expected. (Unfavourable)
- Decrease in staff morale and motivation (Unfavourable)
- Staff fatigue (Unfavourable).
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Example: Direct Labor Variance
Wize Corporation manufactures a single product and has the following standard costs per unit of finished goods:
The company's master budget indicates that the normal capacity for any given month is 5,000 units, and in the month of August 2020, 4,800 units were actually produced. The budgeted variable and fixed overhead cost are $87,500 and $112,500 respectively. In producing the 4,800 units, the following costs were incurred:
Compute the Direct Labour price, quantity and total variance.
Practice: Direct Labor Variances
Buono Corporation manufactures fire extinguishers for residual and commercial use. The standard material cost of producing one unit is $30 (3 lbs of material @ $10/lb). The standard labor rate of workers at the company is $15 per hour, and it is expected that each unit will require 1 hour of labor to be produced.
The budgeted overhead cost is $500,000, of which 30% is variable and the rest is fixed. The company's budget is based on producing 10,000 units this year.
At the end of the year, the company had produced 9,300 units and the following costs were incurred:
- Direct materials (31,000 lbs) $308,450
- Direct labor (9,100 hours) $141,050
- Variable overhead: $180,000
- Fixed overhead: $334,550
Answer the following questions, do not use any symbols ($, %, !);
Use the first blank for the value and in the second blank enter F for favorable and U for unfavorable.
Direct labor rate variance
Direct labor quantity variance
Total labor materials budget variance