Direct labor rate variance

Definition

Direct labor rate variance measures the difference between the actual hourly wage paid to workers and the standard hourly wage expected, multiplied by the actual hours worked. It helps in assessing whether labor costs are being controlled effectively.

5 Must Know Facts For Your Next Test

1. Direct labor rate variance is calculated as (Actual Hourly Rate - Standard Hourly Rate) x Actual Hours Worked.
2. A favorable variance occurs when the actual hourly rate is less than the standard hourly rate.
3. An unfavorable variance indicates that more was paid per hour than anticipated in the standard cost.
4. This variance can be affected by factors such as wage increases, overtime premiums, or hiring employees with different pay rates than planned.
5. It is essential for budget control and performance evaluation in manufacturing and service industries.

Review Questions

• How do you calculate direct labor rate variance?
• What does a favorable direct labor rate variance indicate?
• List two factors that might cause an unfavorable direct labor rate variance.

Related terms

Standard Cost: The predetermined cost of manufacturing a single unit or a number of units during a specific period.

Direct Labor Efficiency Variance: Measures the difference between the actual hours worked and the standard hours allowed, multiplied by the standard hourly rate.

Variable Overhead Rate Variance: The difference between actual variable overhead costs incurred and what should have been incurred based on the standards set for production levels.