direct labor analysis

When a business manufactures products, direct labor is considered to be the labor of the production crew that produces goods, such as machine operators, assembly line operators, painters, and so forth. They include; the number of hours that an average worker would require to produce one unit and the pay rate per hour of direct labor to the average worker Direct Labor Variance analysis Undeniably, in the real world it is practically difficult for the actual outcome actually to reflect the standardized model. All other labor is, by default, classified as indirect labor. 0000012213 00000 n A direct labor variance is caused by differences in either wage rates or hours worked. Direct labor cost is essentially the work related expenses that can be attributed to the actual manufacturing of a product/good. Direct Material Variance Formulas. Information About A Production Week Is As Follows: Standard Wage Per Hr. To compute the direct labor price variance, subtract the actual hours of direct labor at standard rate ($43,200) from the actual cost of direct labor ($46,800) to get a $3,600 unfavorable variance. The Art of the CFO: Virtual Financial Leadership Workshop. Examples of direct labor costs include the following: Sometimes it may be appropriate to use direct labor as a cost driver to allocate indirect costs to a production process. $320,000 is computed as: 40,000 standard DL hours for the actual production (4 x 10,000), multiplied by $8.00 – the standard rate per hour. 0000003297 00000 n For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. Four hours are needed to complete a finished product and the company has established a standard rate of $8 per hour.

The standard cost of direct labors comes to $48,000.

%PDF-1.4 %���� Now plug the numbers into the formula for the direct labor quantity variance: Direct labor quantity variance = SR x (SH – AH) = $12.00 x (4,000 – 3,600) = $12.00 x 400 = $4,800 favorable. 0000011626 00000 n If an element of proposed direct labor cost appears suspicious, concentrate more analysis effort on that element than on a less suspicious cost element of similar dollar value. 0000013861 00000 n Direct Labor Variance Formulas An adverse labor efficiency variance suggests lower productivity of direct labor during a period compared with the standard. Here is how to calculate direct labor cost per unit of production: First, calculate the direct labor hourly rate that factors in the fringe benefits, hourly pay rate, and employee payroll taxes.

If the total actual cost is higher than the total standard cost, the variance is unfavorable since the company paid more than what it expected to pay.

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