Direct Labor Variance Formulas

Other Category: Accounting

July 23, 2013
Dan
direct labor, direct labor variance, efficiency, employees, labor, variance

Commonly used direct labor variance formulas include the direct labor rate variance and the direct labor efficiency variance. Below are the formulas for calculating each of these variances.

Direct Labor Rate Variance

Direct labor rate variance measures the cost of the difference between the expected labor rate and the actual labor rate.
If the variance demonstrates that actual labor rates were higher than expected labor rates, then the variance will be considered unfavorable. If the variance demonstrates that actual labor rates were lower than expected labor rates, then the variance will be considered favorable.
Using the following formula. A positive DLRV would be unfavorable whereas a negative DLRV would be favorable.

DLRV = AH (AR – SR)
DLRV = Direct labor rate variance
AH = Actual labor hours required for the operations
AR = Actual labor rate paid to employees
SR = Standard labor rate, or the estimated labor rate paid to employees

Direct Labor Efficiency Variance

Direct labor efficiency variance measures the cost of the difference between the expected number of labor hours required for the operations and the actual number of labor hours required for the operations.
If the variance demonstrates that the actual number of labor hours required was higher than expected number of labor hours required, then consider the variance unfavorable. If the variance demonstrates that the actual number of labor hours required was less than expected number of labor hours required, then consider the variance favorable.
Using the following formula. A positive DLEV would be unfavorable whereas a negative DLEV would be favorable.
DLEV = SR (AH – SH)
DLEV = Direct labor efficiency variance
SR = Standard labor rate, or the estimated labor rate paid to employees
AH = Actual labor hours required for the operations
SH = Standard labor hours, or the estimated labor hours required for the operations
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Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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