Direct labour cost variance refers to the standard cost of direct labour for the actual number of units produced less the actual cost. A total variance might have been caused by two factors: either the difference in the number of labour hours that are being used or by a difference in the wages paid to labour.
Because two different factors are affecting the total direct labour cost variance, they must be divided into the following 2 types:
- Direct labour rate variance: This is the difference between the standard and actual cost of labour for the actual number of hours worked.
- Direct labour efficiency variance: This is the difference between the actual and standard number of hours for the actual number of units, valued at the standard wage rate.
The following are the formulas for calculating each of these variances:
- Direct labour rate variance:
Actual number of hours x (Actual labour rate – Standard labour rate)
- Direct labour efficiency variance:
Standard labour rate x (Actual number of hours worked – Standard number of hours worked)
- Total labour cost variance:
Direct labour rate variance + Direct labour efficiency variance
For example, the following information is given about a product:
- Actual number of hours worked: 780 hours
- Actual cost: $2418
- Standard cost: $2340
- Number of units produced: 200
- Standard number of hours worked: 800 hours
The direct labour rate variance = $2340 – 2418 = $78 adverse
The direct labour efficiency variance = $3(800 – 780)= $60 favourable
The direct material cost variance = $18 adverse
Where appropriate records exist, an idle time variance can be calculated by multiplying the hours of idle time by the standard rate. The variance calculated in this way, together with efficiency variance, becomes the labour efficiency variance.