Direct labor cost variance

Last updated: 21.03.2016

Direct labor cost variance can be split into:

 

  • Direct labor rate variance

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

 

  • Direct labor quantity (efficiency) variance

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



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