Direct labor cost variance can be split into:
Calculation: actual total direct labor costs - (total actual labor hours worked x budgeted labor hour rate)
Interpretation: calculates the portion of labor costs variance driven by the changed labor rate per hour
Possible reasons for variances: changes in staff qualification and skills, general increase of wages in economy, premiums paid to finish a job quickly, poor budgeting
Calculation: (total actual hours worked – total budgeted hours worked) x budgeted labor hour rate
Interpretation: calculates the portion of labor costs change driven by the changed number of labor hours worked
Possible reasons for variances: the effect of learning curve, errors in allocating labor hours to products (27; p.232-8), changes in staff qualification and skills, changes in material quality, idle time, poor budgeting