Labor Variance

 The logic for direct labor variances is very similar to that of direct material. The total variance
for direct labor is found by comparing actual direct labor cost to standard direct labor cost. If
actual cost exceeds standard cost, the resulting variances are unfavorable and vice versa. The
overall labor variance could result from any combination of having paid laborers at rates equal
to, above, or below standard rates, and using more or less direct labor hours than anticipated.
 In this illustration, AH is the actual hours worked, AR is the actual labor rate per hour, SR is
the standard labor rate per hour, and SH is the standard hours for the output achieved.
 The Total Direct Labor Variance consists of:
 Labor Rate Variance: A variance that reveals the difference between the standard rate and
actual rate for the actual labor hours worked [(standard rate – actual rate) X actual hours].
 Labor Efficiency Variance: A variance that compares the standard hours of direct labor that
should have been used to the actual hours worked. The efficiency variance is measured at the
standard rate per hour [(standard hours – actual hours) X standard rate].
 As with material variances, there are several ways to perform the intrinsic labor variance
calculations. One can compute the values for the red, blue, and green balls. Or, one can
perform the noted algebraic calculations for the rate and efficiency variances.

PPT 9 -1
 Labor Variances

Formula Approach:
LRV = (AR - SR)AH LEV = (AH - SH)SR
= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00
= $3,900 U = $6,000 F

SQ = 20,000 units x 2 hrs. per unit

Diagram Approach:
AH x AR AH x SR SH x SR
39,000 x $6.10 39,000 x $6.00 40,000 x $6.00

LRV = $3,900 U LEV = $6,000 U

Responsibility: Responsibility:
Human Resources Manufacturing

Flexible Budget Variance = $2,100 F

PPT 9 -2